|  | | Price | 0.160 | | | Change | +0.010 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 6.440 | | | Change | -0.040 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 15.120 | | | Change | +0.430 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 2.740 | | | Change | -0.140 | |
Research Wizard
Add to MSN Stock List
Message Board
Street Patrol
Recent articles:
• Auto-parts pair pull away from the pack, 5/27/2004
• Maritime stocks that could float your boat, 5/20/2004
• 3 department stores stylin' for profits, 5/13/2004
More...
| | Street Patrol
4 high-value airlines investors ignore
Climbing earnings, sinking stock prices -- what's wrong here? Regional air carriers boast real profits and attractive valuations, yet investors refuse to get on board. Here's why they're wrong.
By Robert Walberg
Spooked by high oil prices and by the shaky financial condition of the major long-haul carriers, investors have grounded most of the regional airline stocks. America West (AWA, news, msgs), Mesa Air Group (MESA, news, msgs), Atlantic Coast Airlines (ACAI, news, msgs) and Frontier Airlines (FRNT, news, msgs) are all down by more than 20% this year.
Interestingly, all of these carriers, with the exception of Atlantic Coast, are expected to post a profit in the current fiscal year, with earnings projected to climb again in 2005. The profit picture is the same for AirTran Holdings (AAI, news, msgs), JetBlue Airways (JBLU, news, msgs), Pinnacle Airlines (PNCL, news, msgs), SkyWest (SKYW, news, msgs) and MAIR Holdings (MAIR, news, msgs).
Now, Ive been around the markets long enough to know that earnings drive stock prices, so when I see a divergence like the one in the regional airline group, it sparks my interest. What the discrepancy between results and price performance tells me is that either the investment community has no faith in the analytical community, or that the group is suffering from guilt by association.
While recent history has shown that its healthy to view analysts estimates with a dose of skepticism, its difficult for me to accept that the entire community following the regional airline group could possibly be getting the earnings picture so wrong. Its not as though these folks are operating with blinders on and know nothing about the high price of crude and the lousy financial state of the long haul carriers.
As a result, Im left to believe that the pullback has more to do with fear than fact. Investors see higher oil prices and assume that means trouble for airline stocks -- all airline stocks. Investors read that Delta Air Lines (DAL, news, msgs) might be forced to declare bankruptcy and they assume that the regional carriers associated with the company will also suffer. Though there might be a grain of truth in each of these concerns, the reality is that neither accurately reflects conditions in the regional airline group.
Insulated from fuel prices
For one thing, many regional carriers have little to no exposure to rising fuel costs as prices are capped under the contracts with their respective partners. Meanwhile, those regional airline companies that operate independently, such as JetBlue, have been able to take advantage of their relatively strong financial condition to hedge against rising oil prices. By contrast, the financially strapped major carriers are largely not hedged and are feeling the full weight of the rise in fuel costs.
Investors appear to be equally unclear on the contract status between regional and long-haul carriers. Whereas Delta, United and American Airlines might be experiencing financial difficulties, most regionals sought better terms from their renegotiated contracts shortly after Sept. 11. Consequently, short of liquidation, the near-term risk to earnings from these relationships is limited.
Ray Neidl, an airline/aerospace analyst with Blaylock Partners, lends support to this view, noting there are no liquidations in the immediate future and, given that most major carriers squeezed margins out of the regionals, theres not much room for renegotiating better terms.
Some big-airline ties do bind
Where Neidl does see some risk is in carriers such as ExpressJet (XJT, news, msgs) that are linked to only one carrier -- in this case, Continental Airlines (CAL, news, msgs). The companys contract lasts for a few more years, so theres no near-term risk to earnings. But at some point Neidl believes the company will have to replace revenue by either flying independent routes or finding another partner. This uncertainty helps to explain why ExpressJet trades at a paltry six times estimated 2005 results despite 12 consecutive quarters of rising earnings.
Taking things a step further, its very possible that the continued financial plight of the major carriers works for, rather than against, the regionals. As Delta, United, American and the others reduce their less profitable long-haul routes, they may very well increase their dependence on the regional carriers to maintain a footprint in the industry. In any case, its tough to see how the regional carriers could be hurt near-term by their relations with the major airline companies.
Having discounted the markets chief concerns regarding the regional carriers, we are left with a group in an unpopular industry trading at very attractive valuations. Though its impossible to predict exactly when the market will realize the long-term potential of the group, its rare that such value goes unnoticed for too terribly long. Consequently, risk tolerant, growth oriented investors might want to consider hoping aboard the group.
4 regionals stand out
But just as investors shouldnt treat the regional carriers the same as they do the long-haul airlines, they shouldnt treat all regionals alike. JetBlues exposure to higher oil prices, while limited, still makes its stock a riskier play than that of SkyWest. JetBlues still-lofty valuation also makes it more vulnerable to earnings shocks. Valuations at AirTran, America West, MAIR and Frontier are also too high for my liking, with estimated price/earnings ratios ranging from 15 to 45 times. Meanwhile, Atlantic Coast and Alaska Air Group lack near-term earnings visibility and should lag behind their peers for the foreseeable future.
That leaves us with the following stocks: ExpressJet, Mesa, Pinnacle and SkyWest. There are concerns for each of these stocks. As noted above, ExpressJet is limited to one partner. The same goes for Pinnacle, which flies exclusively for Northwest Airlines (NWAC, news, msgs). Pinnacles contract also limits the size of regional jets it can fly. Whereas, Mesa and SkyWest have multiple partners, counted among them are United, US Air and Delta -- not the most solid of players financially. However, each company is profitable, and as a group they sport some of the best margins in the industry. In addition, valuations are extremely compelling with the group trading at an average of 0.63 times trailing twelve-month sales and 8.5 times estimated fiscal year 2004 earnings.
Theres really no telling what will trigger the groups reversal, but dont be surprised if the regional airline stocks get off the ground in the months to come; and when they do these four stocks should hit cruising speed more quickly than the rest.
At the time of publication, Robert Walberg did not own or control shares of any of the equities mentioned in this column.
|
