by Charlie
Spotlight Stock – Express Jet (XJT) – $5.89/share
As I’m writing this I am currently waiting on for a Southwest flight from Nashville to Philadelphia. To keep with the theme, today I will be reviewing an airline stock. The company does not actually make my ugly ducklings list as the price to net tangible assets is currently a little high at 1.1, but it meets my other criteria with flying colors (enterprise value to revenue at 0.10, price to earnings at 3.8, growth at 5.1%).
For the past 20 years, the airline industry has been a pretty lousy place to be invested. Financial pain in the industry has been very real with many companies declaring bankruptcy including Northwest, United, Delta, US Air, Mesaba, and Independence Air. The pain inflicted by 9/11 and high oil prices has led to significant underinvestment in the industry over the past 5 years. Additionally, investor mentality has set in that airlines are a mostly unprofitable place to invest and it is cyclical. Because of this, some bargains are beginning to appear in the industry. One such bargain is Express Jet (XJT). Based on the financials ratios, the stock is a good value:
Stock Price: $5.89
Market Cap: $318 million
Revenue: $1.68 billion (ttm)
Net tangible assets: $288 million
Net cash: $150 million
Enterprise value to revenue: 0.10
Price/earnings: 3.8
Price/net tangible assets: 1.10
Revenue Growth 5.1%
The enterprise value to revenue ratio of the company is significantly lower than the competition. Most airlines trade between 0.5 and 2.0. The P/E is also incredibly low at 4. The mentality has set in that the current profitability in the airline industry will soon return to “normal.” The round trip flight I am waiting on is up about 10% from last month costing $250. I remember when American Airlines made this same flight in 1990, it routinely cost $742. While 10% more feels big, there is plenty more room for higher prices. For Express Jet to sport a P/E of 3.8, people obviously view the current earnings as unsustainable. I’m of the opinion that not only are they sustainable, but airlines will become more profitable as they will be somewhat supply constrained.
With the significant underinvestment over the past few years, the companies holding airplanes and gates will find their assets worth more that they are currently listed on the books. It would be possible for companies to buy more jets, but Boeing is already backlogged and why would an airline want to go buy a fleet of new jets when they can buy a competitive airline cheaper. This is exactly the same condition the oil industry experienced in 1999-2000 (cheaper to buy than drill) and the steel industry experienced in 2003-2004 (cheaper to buy than build). Depreciated assets on the book were worth more to the buyers than building new ones. This is especially true for airplanes as the construction costs are up as aluminum and titanium prices have risen sharply over the past few years.
Another airline in a similar position to Express Jet is Mesa Airline (MESA).
Sell Targets
Based on the financial ratios for other airlines and stocks in general, Express Jet has the potential to increase significantly in value. I do not set price targets for selling, but rather financial ratios at which I sell. As a company performs well or poorly over time, these price targets change. Once I accumulate my shares, I will sell the stock in five equal fractions. Here are my five sell targets for Express Jet (XJT):
Sell 1: 0.5X net tangible assets (currently $18.37)
Sell 2: 0.75X Enterprise value/revenue (currently $26.16)
Sell 3: 1X EV/Rev (currently $33.95)
Sell 4: 1.5X EV/Rev (currently $49.54)
Sell 5: 2X EV/Rev (currently $65.12)
Full Disclosure: I currently own no shares of Express Jet (XJT), but it is on my short list to buy when I have cash come available.
Eric Schleien
zachary
teenmoney
josh4580
Carlton
Are you considering the leases on the jets?
I think there are a couple of issues around the leases. One issue is that Continental has reduced the number of planes they are leasing from XJT as part of their code share. This is about 1/4 of their flights vs 2006. While this will be painful, the contract with Continental is a cost plus contract meaning XJT will still make 8.5%-11.5% on the remaining 3/4 of flights. In the meantime, XJT will be ramping up some of their own business plans (independent their own brand) so the airline should be able to compensate (unlike Atlantic Coast Airlines which became Independence Air in one fell swoop and couldn’t make the transition from code share to branded airline). It is also a good time to make this transition while airlines are becoming very profitable. It is also worth pointing out that Continental can’t reduce planes again until 12/28/09 although they could scrap the whole plan with 12 months notice, but it would be 15 planes per month after 1 year (unwound around end of 2009).
The other leases would be from the aircraft manufacturers. Since XJT was carved out of Continental, I think Continental’s name is on the lease, but if they reduce flights as done recently, XJT still gets the planes. As planes become more scarce, I see this as good.
Even trhough the loss of the Continental flights will hurt XJT some, it should be noted that XJT has reduce debt by a net of $200M in the past three years while simultaneously increasing cash $100M. Not bad for a company with a market cap barely above $300 Million.