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From: Mic Heynekamp <moabmic@y...>
Date: Thu May 8, 2003 1:09 pm
Subject: Interesting article from "TheStreet.com"
Getting Rich Off the Poor Man's Southwest Air
By Eric Gillin
Staff Reporter
05/08/2003 03:05 PM EDT
Click here for more stories by Eric Gillin
Looking to invest in an airline that has solid earnings growth,
double-digit percentage traffic growth, good control over costs and
isn't named JetBlue (JBLU :Nasdaq - news -commentary -research
-analysis) or Southwest (LUV :NYSE - news -commentary -research
-analysis) ?
Consider Mesa Air Group (MESA :Nasdaq - news -commentary -research
-analysis) , a small regional carrier operating out of Phoenix, serving
150 markets as a code-share partner for big guys like America West (AWA
:NYSE - news -commentary -research -analysis) and US Airways . Last
week, the company announced second-quarter earnings that handily topped
Wall Street estimates and on Wednesday, it said traffic was up 31% in
the first four months of 2003.
Savvy investors already have caught on to the Mesa story, doubling the
stock since it hit $3 on March 13, when it was depressed by war fears.
But even after the move, long-term buyers could see additional upside
as the company continues to move away from unprofitable turboprops and
into the regional jets that its larger partners prefer.
Vertical Stabilizer
"The stock has certainly had a nice run, but there's a lot of
opportunity left at this company," said Anthony Cristello, airline
analyst at BB&T Capital Markets. (BB&T hasn't done banking for Mesa.)
"As long as they grow their ability to continue financing aircraft,
there's a material opportunity for long-term growth with US Air."
Cristello isn't alone -- six of the nine analysts covering the company
have it rated at buy or better and none with a sell rating. In
comparison, only four of the 14 analysts covering Southwest have it at
buy or better, with two analysts calling it a sell.
There's reason for optimism. With Mesa trading between $6 and $7 a
share, its price-to-earnings multiple is about 7.5 times 2004 earnings.
That's less than Southwest, currently trading at 29.2 times 2004
earnings, and also JetBlue, which goes for 22 times 2004 earnings.
Investors seeking to avoid the labor showdowns recently seen at AMR
(AMR :NYSE - news -commentary -research -analysis) can sleep easy
buying Mesa. Last quarter, the company signed a 4 1/2-year contract
with pilots and extended its deal with flight attendants, making labor
negotiations a relative nonissue for the next few years.
Drag Coefficients
But investing in airlines, even ones with apparent upside, is always
risky, and it's important to consider Mesa's potential pitfalls.
Mesa was founded in 1982 and previously served the Southwest region
mostly, with propeller planes, ferrying customers in and out of
underserved markets. But as code-sharing's popularity surged,
especially over the last few years, the company has been adding more
and more regional jets, chasing business from larger carriers.
Currently, Mesa plans to jump from the 70 regional jets it had at the
end of 2002 to nearly 170 by the end of 2005.
But expanding capacity and buying more planes during the worst downturn
in the history of commercial aviation is a daunting task, especially
when it comes to finding financing. (Standard and Poor's and Moody's
both have downgraded airline credit ratings in recent months.) More
than fuel costs, labor negotiations or any other factor, Mesa's ability
to raise cash to buy planes will determine its success -- and is the
biggest risk investors must stomach.
"They certainly are one of the lower-cost regional airlines and their
ability to get jets will drive their growth," said Cristello. "They're
partners with US Air, who are clearly willing to give them growth as
long as they can provide jets."
Blue Birds Over
Indeed, US Airways, which just emerged from bankruptcy protection a
month ago, is at the heart of Mesa's growth story. Mesa derives 50% of
its revenue from and currently flies 40 planes in conjunction with US
Air and has plans to add 12 more in 2003. Recently, the company signed
a letter of intent to provide another 50 planes to US Air and is
currently in discussions with management over how to proceed with the
planned expansion.
Because a letter of intent is not a binding contract, the major issue
is how and when Mesa must deliver that many planes. And while Cristello
believes that Mesa's ability to finance these jets will improve as the
airline industry recovers, some analysts caution that management could
be overreaching if it has to add 50 planes all at once.
" [The] carrier reports that it has interim financing lined up
for most of its regional jet deliveries in 2003, which helps alleviate
near-term growth uncertainty," said Brian Harris, analyst at Citigroup
Smith Barney, in a report from last Friday. "But that still leaves
about 15 other undelivered regional jets that are not financed."
In Harris' view, there are too many uncertainties out there to value
Mesa based on 2004 earnings expectations. He estimates there could be
as much as 10 cents per share downside to his 2004 earnings estimates
if the company can't finance what it plans to add. But even Harris is
cautiously optimistic, telling investors that "with the economy
expected to improve, we think the potential upside scenario is more
likely than not."
Propellers
If the financing issue can be managed and the details of the letter of
intent with US Air worked out, then going forward, there are some
catalysts that could certainly boost Mesa shares.
In addition to greater clarity on its situation with US Air, Mesa also
has a bid in with UAL , parent of bankrupt United Airlines, to expand
its role as a code-share partner with that carrier. While company CEO
Jonathan Ornstein was bound by a confidentiality agreement and couldn't
disclose details in a recent conference call, he did add that he felt
Mesa's bid had a good shot.
"I think our offer is extremely competitive," said Ornstein. "And based
on United's own documents that they filed in the bankruptcy, it would
be significantly below their current cost. That's not to say that our
competitors will not sharpen their pencils
