Most airline stocks have been rising this year. This is true for both major and regional airlines. Republic Airways Holdings Inc. (NASDAQ:RJET) is up more than 90% year-to-date. The stock has risen from low values, trading near $5 for the most of 2012. Does it still present value?
Republic Airways Holdings Inc. (NASDAQ:RJET) is an airline holding company and owner of Chautauqua Airlines, Frontier Airlines, Republic Airlines and Shuttle America. It reports its earnings under two segments: Frontier Airlines and Republic Airlines.
Republic Airways Holdings Inc. (NASDAQ:RJET) fell short on analyst expectations in the first quarter. The company reported earnings of $0.01 per share, while analysts were expecting it to report earnings of $0.02 per share. The earnings miss did not do much damage to the stock–it has continued to trade between $10 and $12. Revenue fell 9% compared to the same period in 2012. Meanwhile, operating expenses declined by 10.5% due to lower aircraft-fuel expenses.
Recent results
Republic Airways Holdings Inc. (NASDAQ:RJET) has recently reported April data for both Republic Airways and Frontier Holdings. Available seat miles for Republic Airways declined 7% in comparison with April 2012. Load factor increased one point to 81%. On the Frontier side of the business, available seat miles declined 12% and load factor stayed unchanged at 87%.
The available seat miles measurement shows how many seat miles are available for purchase on an airline. Load factor presents how many seats were actually bought. Available seat miles is a measure that shows the airline’s capacity to carry passengers. If the company is optimizing its business, this gauge can decline and still be positive for the business. With load factor things are simpler: the more, the better.
The problem
The major problem of Republic Airways Holdings Inc. (NASDAQ:RJET) is debt. The company reported a $275.5 million current portion of long-term debt. Long-term debt less current portion stands at approximately $1.8 billion. Stockholders’ equity, which represents the stake in the company that equity investors have, is only $516.9 million. This brings us to a very uncomfortable debt-to-equity ratio of 3.9.
Interest expense ate all the profit in the first quarter. While operating income was $30.1 million, the company’s interest expenses were $29.7 million. High debt levels always pose risks for a company. If the environment is unfavorable, a company that has a lot of debt would run into trouble.
The solution
Republic Airways Holdings Inc. (NASDAQ:RJET) is going to sell its Frontier segment. In the first quarter, Frontier accounted for 49% of total revenue. However, the segment reported a net loss of $20.1 million, while the Republic segment reported a $20.6 million profit. Frontier has $801.2 million in total assets and $144.4 million in total debt. How would the possible sale of Frontier impact the Republic Airways Holdings price? It would depend on the price that the company would be able to negotiate.
However, the sale of the asset that brings losses is generally good for the stock price. With the money that it would get from the purchase, Republic Airways Holdings Inc. (NASDAQ:RJET) would be able to cover a big portion of its long-term debt. Stockholders are interested in earnings, not the sum of total assets. The sale would possibly boost the earnings of Republic Airways.
The bottom line
Republic Airways trades with an attractive P/E of approximately 9.4 and forward P/E of about 6.2. If we compare it to other regional airlines, we would see that JetBlue Airways Corporation (NASDAQ:JBLU) trades at 18 P/E and 9.2 forward P/E, while Southwest Airlines Co. (NYSE:LUV) has a 28 P/E and 11.7 forward P/E.
This difference in valuation is due to the big debt level of Republic Airways Holdings Inc. (NASDAQ:RJET) and uncertainty about the Frontier sale. The big debt level would be a problem if the expenses picked up significantly. This would happen in one major scenario – a big rise in oil prices, and, thus, the aircraft fuel prices. If you don’t believe this is going to happen, then Republic Airways presents a value for you.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines.
The article Take a Look At This Regional Airline originally appeared on Fool.com.
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