Sunday, November 27, 2005

Opportunities in Transport

Technical

The S&P500 and nasdaq composite raced above their previous highs to mark a new leg in this bull market. The S&P500 closed the week at 1268, above its trend channel high of 1260. If the index can hold its ground this market has a real chance of moving much higher. In similar fashion the nasdaq composite broke it trend channel high of 2230, again signaling a catch up to higher multiples is underway. Support now exists at those previous channel highs limiting the risk for new buys.

Opportunities in Transport

Since October air transport stocks have moved higher, in part due to the fall in oil prices, but also for more fundamental reasons. After years of reforms and business reengineering the slow drip of financial death still lingers for the major airlines. Former leaders like United, Northwest and Delta are now in bankruptcy forced there by old labor unions and capable competition. Many analysts call this sector dead and only bottom fishers participate. However, we see it differently.

Advances in avionics have enabled new opportunities for regional airlines. Smaller lower cost jets are filling seats where larger planes are only partly so. Regional airlines with 60-100 seat planes that fly farther on less fuel now give companies like Southwest and Jet Blue, with their larger planes, a run for their money. Gary Kelly, Southwest Airlines CEO is quoted as saying, "There's an old saying around here that you never go bankrupt with too few seats or too few airplanes,", and fewer seats and fewer planes are one way that the regionals are gaining market share. Companies like Mesa Air Group, Republic Airways and Sky West are experiencing solid growth. These small yet growing carriers are taking their faster, cheaper, better business models to market and partnering with the majors, helping to level the playing field for the big boys. As a way to save their businesses the Majors have begun outsourcing to the more efficient smaller airlines, side stepping unions and other cost centers. We are coming into the age of the regional, whose business model offers a growing competitive advantage, giving the smart money an opportunity to get in on the ground floor.

Our fund recently added Mesa Air Group (MESA). Mesa was rated the number one regional Airline in 2005 by Air Transport World Magazine. From a fundamental stand point Mesa has shown steady growth throughout the year meeting or exceeding earnings estimates and increasing average seat miles by over 11% per quarter. Further the company recently initiated a 10 million share buy-back program. Below is a table comparing various airline stocks. It is our belief that MESA is undervalued in relation to its peers.


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TickerPrice/salesPrice/bookP/EROEDebt/EIV/shr
MESA0.272.408.033%427%$23
RJET0.723.488.332%460%$11.67
SKYW1.112.211811%59%$81.47
AMR0.144.79N/AN/AN/AN/A
RYAAYN/A4.382117%60%$49.9
AAI1.034.093874%85%$17.82

1 Comments:

Anonymous PENNY STOCK INVESTMENTS said...

Theirs always some great stocks in the market place.

9:35 AM  

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