Why Julian Robertson's Tiger Management Thinks US Airways Will Fly

In a recent letter to investors in his Tiger Management hedge fund, Julian Robertson wrote, "You are probably sick by now of my babbling about US Airways (U). Nevertheless, I do think our airline team has written the definitive piece on the company."

Babble? Julian Robertson? Not quite the image, but this column does love babble, and Tiger doesn't do much public babbling about its holdings. The babble in question was a detailed explanation -- via veteran airline analyst Michael Derchin et al. -- on why Tiger has become US Air's largest investor with a stake first acquired in May of 1996 when the stock was around 20. It subsequently rose to a high of 83 1/4 last July, before hitting a downdraft that took it back to mid-to-high 40s, where it was when Tiger recently boosted its US Air position to 18.9%. US Air closed yesterday at 48 15/16.

Much of Tiger's enthusiasm is based on what it believes may be "the most aggressive stock buyback program we have seen by any company, in any industry." Tiger is counting on US Air's management to use its "sizable cash flows" to buy $1.8 billion of stock, or 30 million shares, over the next two years.

That chunk would amount to 35% of its current shares outstanding, which leads to another reason Tiger is so high on US Air: Strong earnings growth. Thanks in large part to the share buybacks, Tiger expects US Air's earnings to rise $12 per share by 2001 from the $7.50 that Tiger is forecasting for this year.

Tiger also likes US Air's management team, which it calls "one of the most shareholder-oriented managements in U.S. business today." What's more, Tiger says, management is focused on the long term and doesn't play the quarterly earnings game. (Spoken like true value investors.)

But the real name of the game is buybacks, which are hardly new to US Air. Last year the company bought back 18 million shares. Last quarter it announced another $500 million repurchase problem that is expected to be completed this quarter. Tiger acknowledges that its buyback forecasts are more aggressive than the Street's, but it says that's because most analysts have built in little-to-no repurchases this year, partly on the theory that the company won't complete the buybacks. "This seems totally out of touch with reality," Tiger wrote.

If all goes well and US Air trades at just half the market's multiple, Tiger believes the stock could trade as high as at least 168 in two years.

But even Tiger, which declined comment for this column, warns that US Air faces several risks, including any unexpected escalation in an East Coast dogfight with other airlines, a slumping economy and/or poor settlements on several open labor contracts that are still in discussion.

Buybacks or no buybacks, those are just the kind of events that could make it harder for this stock to get off the ground.

Short Positions

Zapped by Zomax: Inquiring readers are eager for an update on Zomax Optical Media (ZOMX), whose stock has fallen by more than half after having doubled after being mentioned here. At the time Chicago money manager Bob Holmes, of Gilford Partners, was head over heels for the stock. He called it the most compelling stock in his portfolio, in large part because of its investment in privately held Chumbo.com, an online retailer of software.

Holmes says he's as psyched as ever about the company and adds that there was no reason for the stock to fall. But then again, there was no reason for it to rise the way it did. "With a stock that thin, it doesn't take much to move it," he says, which is why this column will go out of its way in the future not to mention stocks that are that thinly traded. (Yeah, look at National Music Retailers, another one of this column's winners. Arf!) Holmes says he sold some Zomax higher, bought some after it fell and may buy more after he feels it has bottomed. "Normally you get nervous if there are no earnings or fundamentals, but I'm extremely confident because I know the fundamentals are there," he says.

As this column often warns: Making investment decisions based exclusively on what you read (or hear) here or elsewhere is stupid. If you don't know what you've bought, or why you've bought it, at some point you'll pay. I try to quote smart people whose observations are on the edge, but sometimes even the smartest among them are wrong -- way wrong! And in all likelihood you won't know until after the fact.

I view this thing as a sports column, not a racing form. You should, too. (Which reminds me of another side effect of writing online: This column doesn't end up at the bottom of a bird cage or litter box, which is where, on some days, it belongs.)

Provident's nonplunder: An item here several months ago quoted Joe Garrett, manager of the private American Liberty Fund, as raising questions about Provident Financial (PFGI). He thought it was a bank masquerading as a subprime lender and as a result faced a big writedown of so-called residual strips, which represent the present value of future earnings from subprime mortgage lending. "I was wrong," he says. "They should have, but they didn't." Chalk up another one for financier Carl Lindner, whose family runs the jernt, uh, joint in Cincinnati. (Sorry, there's no escaping those accents!)

The honorable JJC writes in one of yesterday's dispatches: "One thing is certain, this brave new anti-PC world caught most managers flat-footed. The swiftness with which things went from good to bad let virtually no one out."

That's because they were all so busy trying to discredit this column for quoting Piper Jaffray's Ashok Kumar, who was raising caution flags about PC sales when nobody wanted to listen. They also weren't paying attention to the flagging fortunes of such distributors as Tech Data (TECD) and Ingram Micro (IM), whose various earnings pre-announcements should have been a telltale sign.

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