Republic Airways Holdings Inc. (RJET): A Spinoff Value Play for 2013

Meanwhile, Republic’s renewed focus on its regional operations is improving performance. Like many operators of small regional jets (50 seats or less), the company’s Chautauqua Airlines subsidiary has been hurt by rising fuel prices, which have made these aircraft generally uneconomic to operate. However, Republic has reduced its exposure to this market, and is in the midst of restructuring Chautauqua to improve cash flow by $60 million annually.

Furthermore, Republic is benefiting from the industry shift toward larger regional aircraft. Last year, the company’s Republic Airlines subsidiary signed an agreement with United Continental to operate 32 large Q400 turboprop aircraft, replacing flying done by now-defunct Colgan Air. More recently, Republic won a contract from American Airlines to operate 53 large regional jets for 12 years. As a result, the company has ordered 47 new Embraer SA (ADR) (NYSE:ERJ) 175 aircraft, with options for another 47. Since all three major legacy carriers are looking to increase their usage of large regional jets, there is a significant growth opportunity here.

Valuation
Republic traded between $4 and $6 for most of the past year, but jumped more than 50% last month following a bullish investor update.

Republic Airways One-Year Price Chart, data by YCharts

However, even at last week’s closing price of $9.58, Republic trades at just above six times the average analyst estimate for 2013 EPS of $1.56. Republic’s rapidly improving fundamentals make the company an intriguing value play at this time. The expected spinoff of Frontier Airlines later this year should also improve shareholder returns, as the two businesses have minimal synergies and should benefit from being managed separately.

The article Republic Airways: A Spinoff Value Play for 2013 originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL). The Motley Fool recommends Embraer-Empresa Brasileira and Southwest Airlines.

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