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ExpressJet Skids on Downgrade

The shares lose 5% in afternoon trading.
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Shares of

ExpressJet

(XJT)

fell nearly 5% on Tuesday after UBS downgraded the company to neutral from buy, telling investors that shares of the nation's largest regional carrier are overvalued.

The downgrade came after ExpressJet passed analyst Robert Ashcroft's price target of $17 last week.

Ashcroft also warned that ExpressJet's revenue outlook could be weak, due, ironically, to the carrier's cost-cutting efforts.

"ExpressJet has been cutting costs faster than we expected," wrote Ashcroft. "In the topsy-turvy world of regionals, this is both bad and good, in our view. It's bad because profits are in large part based on a margin over

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the carrier's costs. If costs decline, then so do underlying profits."

The analyst added that after this year, the carrier will receive lower operating margins to fly for Continental, dropping from close to 13% in 2003 to 10% by the end of 2004.

But there is a bright spot for ExpressJet: Its cost structure may make it an attractive option for other network carriers looking for a regional partner. And while Ashcroft said "finding other business will likely be difficult," the analyst added that

Northwest Airlines

(NWAC)

could be a potential partner.

Shares of ExpressJet were down 82 cents at $15.92 in afternoon trading Tuesday.