When reviewing the quarterly results for Republic Airways Holdings Inc. (NASDAQ:RJET), a couple of numbers really stuck out as shocking and actually in a good way. The company reported the amazing combination of lower revenue yet higher operating margin. What is going on in the airline industry that is allowing this focus on profits?
The company competes in the ultra-low-cost-carrier (ULCC) segment versus the better-run companies of Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) . Allegiant, though, reported disappointing results that sent the stock plunging, but Spirit Airlines was able to beat results.
Shocking positive numbers
These numbers may not be that shocking to investors following the industry, but those on the outside seeing airlines with the legacy issues will be amazed. The attention grabbing numbers for Republic Airways Holdings Inc. (NASDAQ:RJET) were that operating revenues plunged 8.7% while the operating margin jumped 1.6 points. The combination led to a 15% jump in earnings per share.
So what led to the situation where an airline could reduce revenue and actually improve earnings? Mainly the industry is more focused on profitable revenue instead of market share. In fact, the Republic segment saw pre-tax income surge 46% to $27.7 million partly by reducing passenger service revenue with the Frontier division that is up for sale. The aircraft used for that reduced service were either transitioned to more profitable fixed-fee services or sold.
The Frontier segment actually saw pre-tax income decline slightly to $13.7 million Considering the extremely high load factor of over 90%, the division continues to struggle to prove a high level of profits. The inability to increase utilization suggests a new strategy is needed for that division.
Beating earnings
Republic Airways Holdings Inc. (NASDAQ:RJET) reported earnings of $0.46 that beat estimates of $0.42. Considering the stock only traded at 7.4 times forward earnings, anything that boosts those numbers should help push the stock higher. Investors will be keen to follow whether the company can continue boosting earnings without revenue growth. Analysts expect a jump in earnings from $1.11 in 2012 to $1.49 this year and $1.77 next year. Note that this surge in earnings will take place with revenues slightly declining from 2012 to 2014.
The stock initially acted weak due to missing the revenue expectations with $664.4 million versus the $671 million consensus, but it quickly rebounded to solid gains.
Industry remains cheap
This group isn’t as value priced as the major airlines, but the stocks all trade considerably below growth multiples. Spirit Airlines Incorporated (NASDAQ:SAVE) generally reported in-line results that should provide support to a stock trading at 14 times forward earnings while analysts forecast a long-term growth rate of 24%.
Allegiant Travel Company (NASDAQ:ALGT) is probably the conundrum in the industry based on the Q2 2013 earnings miss and analysts reducing 2013 estimates to $5.08 from $5.40. The forward earnings still provide value if the 21% long-term growth rate remains intact.
Bottom line
Republic Airways Holdings Inc. (NASDAQ:RJET) continues to make positive moves that improve profitability regardless of the impact to revenue. This news remains refreshing for an industry that historically struggled to be profitable. All of the stocks in the ULCC are extremely cheap based on growth rates. Most investors look at the recent stock returns and lose focus that the industry still trades at below market multiples. Investors should continue buying these stocks especially on dips with Republic Airways as the value play and Spirit Airlines as the growth play.
Mark Holder and Stone Fox Capital Adisors, LLC have no positions in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines.
The article Shocking Results at Republic Airways originally appeared on Fool.com and is written by Mark Holder.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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