Republic Airways Holdings, Inc. (RJET)

On September 09, 2009 at 1:24 PM, checklist34 (99.86) wrote:

RJET, to date, has been a company that operates flights for other airlines. Basically, if you are United or Delta or whomever, you would hire RJET to fly some flights for you. RJET owns and/or leases planes, trains and employes crews, and operates flights for larger airlines for a fee. Fuel costs, to date, have not been relevant to RJET as they pass this cost through to their customers. As this business alone, RJET is priced fairly cheaply, highlights of current valuation (as its initial core RJET business alone include):

mkt cap about $300M, sales about $1.4B, profit in a recent years about $70-80B. P/E 6, forward p/e 4, price/book 0.6. These are good valuations that imply the stock is probably priced too cheaply based on existing businesses and existing prices.

However, in recent months RJET has made a profound change to its business. It aquired, for essentially nothing, Midwest Airlines and, also for next-to-nothing, Frontier Airlines. Frontier will emerge from bankruptcy in the near future, and has been profitable for 10 consecutive months while in chapter 11, most recently Frontier profited $17M in July, also $11M in June I believe. Frontiers revenue is similar to RJETs, I honestly don't know what the revenue at Midwest is.

The combined company - RJETs original business + Frontier + Midwest would be a $3+ billion dollar company, giving it a price/sales of less than 0.1. It would also, at current profit rates at Republic and Frontier, have earnings potential of $70M (republics past annual profits) + $100M (a not-aggressive annualized profit estimate for Frontier based on recent months performance) + $30M of synergy savings (estimated at 20-50M by rjet management) + profit - loss at Midwest (currently not profitable). That comes to $200M of annualized profits putting RJET at a forward p/e of 1.5. If it traded at a multiple of 7.5 you have a 5 bagger from todays share price. In an extremely good case where Frontiers profitability was as good as it has been in recent months, republics original business returned to peak profitability, cost savings were at the high end of the scale, and Midwest turned profitable, earnings could be higher. At a multiple of 9 (as high a multiple as RJET had in the past) valuation would still be well under LUVs in basically all areas and the market cap would be a large multiple of todays.

There are of course risks. Some concerns that have been voiced by various parties include deterioration of Republics initial business (contract flying) due to it now being a competitor with its customers. RJET now has exposure to fuel prices. RJET faces the challenge of a fundamental change of what its business is and those may not be trivial. LUV may become angry over losing the frontier auction and aggressively attack RJET's Frontier and Midwest businesses in Denver and Milwaukee.

Still, it is difficult to imagine a long term case where the PPS has significant downside from here except in an everything-went-wrong situation.

I am willing to bet against an everything-went-wrong situation because I think RJET has competent management, and, frnakly, I think that beating LUV which at the time had a market cap 25 times larger than RJETs in the auction for Frontier speaks to that managerial competence.

I have put my money where my mouth is with the a large stake in real life at $6.50, I added slightly to that stake in the $8's recently. This rec on CAPs is from a higher PPS which is too bad, but I still think that in the fullness of time this pick will be a big winner.