An Airline Industry Anomaly

The last thing any investor wants to hear about these days is a pitch on an airline stock. Who can blame them? The industry, largely reflecting intensifying competition and the big jump in jet fuel prices, is in turmoil. In response, giant carriers such as United and Delta have filed for Chapter 11 bankruptcy protection and speculation is widespread that others may follow suit.Adding to the airline industry’s investment woes, shares of the premier low-cost airlines, JetBlue Airways and Southwest Airlines, two institutional darlings, are languishing.But on Wall Street, there are always exceptions to the rule – a company that somehow manages to buck a bearish trend. A conspicuous case in point is SkyWest, a provider of low-cost regional passenger service for major airlines to 120 cities in 32 states and three Canadian provinces.Its high-flying stock performance tells the story. Trading at $26.52, Sky-West shares have surged about 33% from their 2004 close of $20.06 and 60% from their 52-week low of $16.05. Further, earlier this year, the stock traded at $34.09, a penny less than its all-time high.No doubt its latest results, plus its earnings prospects, are what has the stock sizzling. In the first nine months, the carrier posted 20% profit growth on a 47% sales gain.Going forward, SkyWest, which chalked up 2004 sales of $1.15 billion, is expected to record even heftier earnings gains. This year’s earnings, for example, are pegged at $1.86 a share, up 32% from last year’s $1.41, and another 42% rise to $2.64 is expected in 2006.An “upside opportunity” is the way the stock is described by Upside, a monthly newsletter in Hammond, Ind., which boasts an above-average record in ferreting out winning smaller stocks.Since its May 9 inception, Upside’s best buy list, which includes SkyWest, has gained 318.1%, its managing editor, Richard Moroney, said. In comparison, the Russell 2000 index has risen 53.1%, while the S&P 500 fell 3.4%.Mr. Moroney notes SkyWest is capitalizing on the restructuring of the airline industry in America and believes the company’s profit growth should accelerate in coming quarters. This outlook largely reflects the September acquisition of Atlantic Southeast Airlines, a regional carrier owned by Delta, for $425 million, and an ongoing shift toward low-cost connection carriers.SkyWest, which plans to keep Atlantic Southeast as a separate subsidiary, acquired 151 aircraft in the deal, bringing its total fleet size to 376.SkyWest’s chief customers are Delta (40% of 2004 flights) and United (59%). Under its agreements with these companies, it flies under the names Delta Connection and United Express. If Delta and United avoid liquidation, which Mr. Moroney thinks is likely, Sky-West should be able to capture more business as both airlines accelerate cost-saving measures.Sounds good, but a word of caution. Though he’s a bull, Mr. Moroney cautions that SkyWest’s stock must be considered aggressive, given a balance sheet that’s saddled with more than $1 billion of debt, rapid expansion, and the exposure to the volatile airline industry.Still, his bottom line seems clear: Not every airline stock is a dog.***HOMEBUILDER BAILOUT: If you own one of those hot homebuilder stocks, head for the exits, advises Julian Perlmutter, an analyst at Morningstar, the Chicago-based research house and mutual fund tracker.Observing that executive insiders obviously share his concerns of a frothy market, he considers it noteworthy that management of the 10 largest homebuilders has cumulatively sold about 11 million shares year to date – versus around 7 million in 2004. Accordingly, the analyst is warning clients: “If the people running the day-to-day operations of the firms don’t see more upside, why should investors looking in from the outside?”It’s no coincidence, he believes that the chief financial officer of the luxury homebuilder Toll Brothers has sold nearly double the shares this year that he sold last year.Mr. Perlmutter notes he’s far from alone in his concerns, pointing out that the short interest ratio – the shares sold short as a percentage of total shares outstanding – has inched to the highest industry level in 10 years.“I’m absolutely convinced the homebuilding industry has finally begun its downward spiral,” he says. The sector has enjoyed record earnings, primarily driven by cheap mortgage rates, but rates, he notes, are finally marching upward. A colleague of his, he believes, may sum it all up: “Trees can’t grow to the sky.”

An Airline Industry Anomaly

An Airline Industry Anomaly

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