MESA

[David Randolph]

Since 2003 MESA's revenues and profits are growing steadily and the stock now has a trailing earnings multiple of 7.26. Earnings per share growth is 92.5% and the earnings multiple is 7 

This undervaluation, just because it is an airline, just because of the high oil prices, can't go on for long. The company achieved these results with already high oil prices, and it continues to grow a lot year on year.

They have $1.1B in sales and a market cap of just $283M at this point. I know the airline sector has been out of favor for years and some of the industry leaders filed for bankruptcy, but I don't see this happening with MESA, not at all.

The stock may come down further to the ascending trendline, but I still consider this to be one bearish intermediate trend within a longer term bullish trend that will take MESA to more than double its current share price.

[owen654321]

I believe that Aloha airlines re-emerged from bankruptcy today and will be keeping its flights/pilots/etc.  I have no clue what this means in terms of MESA's planned Hawaiian inter-island service.  Hopefully they will issue a press release to let us know if the expansion is still on, and/or if they will lose money from any changes in plan for their Hawaiian island service.  This is most likely why MESA was down to $9 in after-hours trading.  I am feeling the pain looking at MESA in my portfolio but I have no real reason to sell, so I will continue to hold in hopes of better times...

[shawFund]

I sold MESA two days ago.

I do not love any particular tock. I only trust market.

If stock is down and down hard, there must be many sellers and must be some reasons.

I cannot allow the EYII.OB mistakes happened to my portfolio again. Maximum pain is 7% but normally 3-5% is quite huge for me. Also I will not let the profit turned into loss. That will be very painful.

I may re-enter it later when things become clear.

[David Randolph]

I believe that Aloha airlines re-emerged from bankruptcy today and will be keeping its flights/pilots/etc.  I have no clue what this means in terms of MESA's planned Hawaiian inter-island service.  Hopefully they will issue a press release to let us know if the expansion is still on, and/or if they will lose money from any changes in plan for their Hawaiian island service.  This is most likely why MESA was down to $9 in after-hours trading.  I am feeling the pain looking at MESA in my portfolio but I have no real reason to sell, so I will continue to hold in hopes of better times...

Yes owen654321, probably this was the rumor (now news) that was taking MESA down so hard. Now the company has two options:

1) Go ahead with the expansion plans, even with fierce competition;
2) Give up those plans and look for better opportunities.

As an investor in MESA stock I look back and think of the reasons that led me to buy this stock. None had to do with the expansion plan to the Hawaiian inter-island service. As a matter of fact the stock started declining immediately after the expansion plan was announced.

Either way, this seems to be a classic «sell the rumor, buy the fact» thing. And MESA, opening near $9, will be right at support.

The fact that the company may have problems with its expansion plan in my view won't change the fact that it has an earnings multiple of 7 and strong revenue and profit growth. Also I don't expect it to change the fact that the company will buyback 1/3 of its outstanding shares.

These are the facts that led me to buy this stock for the long term and they are intact. Therefore I'll continue holding it for the long term, I'm expecting 2 to 3 bags of profit on MESA.

I believe today's open will be a good opportunity to add shares (maybe it will close the gap between $8.67 and $8.86, I don't know), buy my internal money management rules don't allow me to that.

[shawFund]

Bought it this morning after open at $8.40.

Will sell it if it fells below $7.90. That is the maximum pain I could have.

If it goes up, will hold it.

[422fwhp]

Roger that!  In at $8.45 so I should have minimal downside risk...just like I like it.

Definately appreciate the updates David.

laterz...Jody

[Terliso]

Put some money onto the MESA!!!

[minkielover]

Great, Terlisa.
I wanted to buy more but I didn't have any more fund..
By the way, I bought SIRI with you but it's not doing well..  .
Well, I'll keep track of your update.
Thanks.

[Terliso]

Great, Terlisa.
I wanted to buy more but I didn't have any more fund..
By the way, I bought SIRI with you but it's not doing well..  .
Well, I'll keep track of your update.
Thanks.

I know, they upgrade SIRI 2 days ago to "BUY" then downgrade today to "SELL" ...what the **** 

[David Randolph]

Bought it this morning after open at $8.40.

Will sell it if it fells below $7.90. That is the maximum pain I could have.

If it goes up, will hold it.

Good move and strategy shawFund 

Roger that! In at $8.45 so I should have minimal downside risk...just like I like it.

Definitely appreciate the updates David.

laterz...Jody

Thanks Jody and yes, $8.45 seems to be a great short and long term buying price.

Put some money onto the MESA!!!

Nice chart Terlisa, as usual 

I know, they upgrade SIRI 2 days ago to "BUY" then downgrade today to "SELL" ...what the ****   

I don't think it is a good idea to buy or sell based on brokerage upgrades/downgrades.

People heavily sold MESA yesterday, specially at the open, because a competitor is coming out of bankruptcy, Aloha Airlines, a private company that makes inter-island flights in Hawaii. But some problems for Aloha emerged yesterday: Aloha may not exit bankruptcy this week

I feel all this is nonsense, because I don't think the expansion plans to Hawaii are all that significant. Remember this: «As of January 5, 2005, it had a fleet of 183 aircrafts with approximately 1,100 daily system departures to 177 cities, 41 states, the District of Columbia, Canada, Mexico, and the Bahamas. Mesa Air Group was founded in 1980 and is headquartered in Phoenix, Arizona.»

Short term the news and gossip are impacting the stock price, but longer term fundamentals reign supreme. Fundamentally speaking I see a company with fast growing revenues and profits in an era of pretty high oil costs and difficulties for the airline sector. I see a company that is buying back shares, thus reducing the number of shares outstanding, so price needs to rise to keep the same market cap.

Technically the stock closed the gap it left open last October and made a white candle with above average volume.

I'll continue holding MESA for the long term, I'm convinced this Hawaiian talk will go away soon  and the stock will make new highs.

[David Randolph]

MESA is coming back after a big drop to support and «closing gap» levels. The 10-K quarterly report from the company was just published and I'll love to read and analyze it, but now I don't have enough time.

MESA is a case where long term investors got a nice buying opportunity because of short term rumors and news.

I'll continue holding MESA for the long term.

[shawFund]

If any stock I would like to have in airline sector, it is AMR or CAL.

AMR gained another 10% in last few days.

[David Randolph]

You're right, AMR had an amazing run, I wish I bought it. But, you can't have them all ...

Here are charts for historical trends in Revenues and Earnings Per Share for MESA:



We can clearly see a trend for growth over the last 3 years, with revenues of $1.1B in fiscal 2005. This leaves the company with a Price to Sales Ratio of 0.24, where the industry's P/S Ratio is 0.55.



Earnings for MESA have been quite volatile in its history, but now we have 3 consecutive years of profits. 2005 was an all time high both in terms of revenues and net income.

With an EPS of $1.35 MESA has a Price Earnings Ratio of 6.92, where as the industry's average P/E Ratio is 14.2, or more than double.

Using just these two criteria we see that on relative terms MESA is trading at a 50% discount to its industry. It needs to rise 100% to be on average.

If we take into account that the company plans to buyback 1/3 of its shares outstanding, the stock price needs to rise 200% for the stock to achieve the industry average valuation.

Technically the long term trend is bullish, but there was a short to medium term decline over the last month. Why? Because of the company's expansion plans to Hawaii. This doesn't make any sense, since 99% of the company's revenues come from code-share agreements with other airlines:

«Approximately 99% of our consolidated passenger revenues for the fiscal year ended September 30, 2005 were derived from operations associated with code-share agreements. Our subsidiaries have code-share agreements with America West, Midwest Airlines, United Airlines and US Airways. The remaining passenger revenues are derived from our independent operations.»

I'll continue studying MESA and continue holding it for the long term.

[David Randolph]

MESA is recovering well from previous declines. On Friday Zacks issued a report about it:

«Mesa Air Group, Inc. (NASDAQ:MESA) released its fiscal fourth-quarter financial results in mid-November. Earnings per share were ahead of analysts' expectations by nearly 17% and surpassed the prior year's performance. Total operating revenues increased 18.9% year-over-year. The stock is currently trading around $9.30 per share, with a price-to-sales ratio of 0.24. The company has earned $1.30 per share over the past 12 months.»

As we've seen MESA is about 50% undervalued when compared to the airline sector. But of course that undervaluation has a reason, an it is not about debt or the company's expansion plans. It can be more serious.

I'll have to dig further to know the truth and I'll do it on my next update for MESA. For now I'll just continue holding MESA.

[David Randolph]

As we know MESA is undervalued, but that's for a good reason, as we can read on the paragraphs below, taken out of the last 10-Q report from the company:

«Approximately 99% of our consolidated passenger revenues for the fiscal year ended September 30, 2005 were derived from operations associated with code-share agreements. Our subsidiaries have code-share agreements with America West, Midwest Airlines, United Airlines and US Airways. The remaining passenger revenues are derived from our independent operations.»

«As discussed in Note 2, substantially all of the Company's passenger revenue is derived from code-share agreements with United Airlines ("United"), America West Airlines, Inc. ("America West"), and US Airways, Inc ("US Airways"). UAL Corp., the parent company of United, has not emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code. Additionally, US Airways filed for bankruptcy protection and in September 2005 the bankruptcy court entered an order confirming US Airways' plan of reorganization, which includes the merger between US Airways and America West. As a result of US Airways' emergence from bankruptcy and their non-assumption of the Company's code-share agreement, the Company expanded its regional jet code-share agreement with United and entered into a new code-share agreement with Delta Air Lines ("Delta"). In September 2005, Delta also filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Delta has not yet assumed the Company's code-share agreement in its bankruptcy proceeding.»

«If our code-share partners or other regional carriers experience events that negatively impact their financial strength or operations, our operations also may be negatively impacted. We are directly affected by the financial and operating strength of our code-share partners. Any events that negatively impact the financial strength of our code-share partners or have a long-term effect on the use of our code-share partners by airline travelers would likely have a material adverse effect on our business, financial condition and results of operations. In the event of a decrease in the financial or operational strength of any of our code-share partners, such partner may seek to reduce, or be unable to make, the payments due to us under their code-share agreement. In addition, they may reduce utilization of our aircraft. Although there are certain monthly guaranteed payment amounts, there are no minimum levels of utilization specified in the code-share agreements. UAL Corp., the parent company of our code-share partner United Airlines, has not emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code. Additionally, US Airways, which accounted for 31% of our consolidated passenger revenue for the fiscal year ended September 30, 2005, filed for bankruptcy protection. On September 16, 2005, the Bankruptcy court entered an order confirming the debtors (US Airways) plan of reorganization, which included the merger between US Airways Group and America West Holding Corporation, the parent company of America West Airlines. US Airways Group will operate under the single brand name of US Airways through two principal operating subsidiaries, US Airways, Inc. and America West Airlines, Inc. As a result of US Airways' emergence from bankruptcy and their non-assumption of our revenue-guarantee code-share agreement, we expanded our regional jet revenue-guarantee code-share agreement with United and entered into a new revenue-guarantee code-share agreement with Delta and are currently working to transition the jets flown under the US Airways code-share agreement to the United and Delta arrangements. In addition, on September 14, 2005, Delta Air Lines filed for reorganization under Chapter 11 of the US Bankruptcy Code. Delta has not yet assumed our code-share agreement in its bankruptcy proceeding and could choose to terminate this agreement or seek to renegotiate the agreement on terms less favorable to us. If any of our other current or future code-share partners become bankrupt, our code-share agreement with such partner may not be assumed in bankruptcy and would be terminated. This and other such events could have a material adverse effect on our business, financial condition and results of operations. We may also experience additional costs that could adversely affect our operations if we experience any delay in the transition of aircraft flying under our US Airways code-share agreement to United or Delta. In addition, any negative events that occur to other regional carriers and that affect public perception of such carriers generally could also have a material adverse effect on our business, financial condition and results of operations.»

In short, the reason for MESA's low earnings multiple is:

1) 99% of its revenues come with Code-Share Agreements with major airlines (United Airlines, America West Airlines and US Airways).
2) United Airlines filed for bankruptcy in September.
3) US Airways also filed for bankruptcy in September 2005.
4) US Airways merged with America West Airlines after its emergency of bankruptcy. US Airways did not assume its Code Share Agreement with MESA.
5) MESA entered into a new Code Share Agreement with Delta Airlines, but, also in September 2005, Delta filed for bankruptcy and Delta has not yet assumed the Company's code-share agreement in its bankruptcy proceeding.
6) MESA said it would expand to an inter-island Hawaiian service, but competitors are coming out of bankruptcy, so the market didn't like the company's move.

These 6 points fully explain why MESA's earnings multiple is so low. The risk is revenues from the company are cut in more than half. But I find it odd that when all these bankruptcies have emerged, MESA's stock actually went up:



It looks like it was all discounted at that point.

The fall from MESA started on November the 18th, that was the day after a conference call from the company. I don't have time to listen to it now, but I guess guidance for the 4th quarter wasn't good.

Reading back to what made me buy MESA and say I would hold it for the long term is no longer valid. The company is dependant on other airlines that filed for bankruptcy and turned their back on MESA. Also, the share buyback program, isn't as valid as it seemed, because the company could have bought more shares on the previous program and it didn't. Only bought around $5 and $8 and will only buy more if the price is really attractive (probably between $5 and $8).

If MESA's revenues are indeed cut by 30 or 40% in 2006, profits will erode or disappear and all multiples I was basing my investment will be gone.

The 3 Stocks on Fire Portfolio shows just a 2.91% loss in MESA at this moment. I'll take it without hesitation around today's open.