"[B]y being the primary contractor for both Continental and United with binding agreements related to both Continental and United, SKYW will clearly be at the table as the new United/Continenal sorts out its future regional jet fleet and strategy," he wrote, adding definitively: "We believe SkyWest has positioned itself to be the winner as contracts get modified, and potentially expanded, following the United/Continental merger."
As for whether SkyWest is paying too much for XpressJets, McAdoo believes the company has a strong plan in place for when the deal closes, which is expected to take place in the fourth quarter.
He notes that merging ExpressJets' operations into those of SkyWest's Atlantic Southeast Airlines unit should eliminate some overhead costs, including the expense of being a public company, and that SkyWest could also opt to pull the plug on XpressJet's floundering charter business and then find other uses for these aircraft or else potentially return them to Continental.
On top of these moves, McAdoo says the cost of the deal is much better than the headline number of $133 million. After taking into account XpressJets' cash balance of $96 million, offset by the assumption of $33 million in convertible notes and $13 million in fees and expenses related to the transaction, he says SkyWest is only spending around $83 million on a net basis.That brings the upgrade back to SkyWest's cash hoard. Besides pointing out recent shrewd moves such as providing a secured ten-year term loan of $80 million with an 11% interest rate to United, McAdoo thinks investors might want to consider a different way of valuing the stock. Rather than relying on just earnings, his method calls for carving out around $500 million of SkyWest's available cash, or roughly $8.82 a share. This leaves the company with around $250 million, which McAdoo views as sufficient to cover day-to-day operations. McAdoo then applies a 4.2x multiple -- consistent with that of what will eventually by SkyWest's only remaining peer, Pinnacle Airlines (PNCL) -- to his current estimate for earnings of $1.60 a share in calendar 2011, and arrives at a valuation of $6.72 per share for the business. That brings the per share value of the stock to $15.54, McAdoo estimated.
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