February 2, 2012 PSW Staff |
addition to operating as an independent carrier, the company has agreements with United Airlines (UAL) and Frontier Airlines (RJET). It also provides charter air service to a variety of customers, including athletic teams and corporations. The company owns approximately 6 Embraer EMB-120 Brasilia and 26 Raytheon/Beechcraft 1900D regional airliners. Despite being choppy, the company's history of earnings has been fairly solid, especially for a 75 cent OTC BB issue. Great Lakes Aviation has seen nine straight years of positive earnings ranging from as little as 13 cents per share in 2003 and 2008 to as much as $1.09 per share in 2006 and $1.26 per share in 2007. Earnings have been a little more consistent over the past 2-3 years with 40 cents per share earned in 2009, and 35 cents per share earned in 2010. Although earnings and margins have been all over the map thanks to volatile energy markets, top line revenue has been climbing steadily in each of the last nine years to reach $125 million in 2010. Revenue softened a tiny bit during the first six months of 2011, but earnings softened quite a bit more due to a large increase in cost of revenue. Remember those high gas prices earlier last year? The company lost 4 cents per share in the first quarter of 2011, and only earned 4 cents in the second quarter. A large debt has plagued this company for some time, which has hampered its ability to grow revenues more aggressively and engage in larger scale hedging against high fuel costs to stabilize the earnings growth. Softening earnings and a boat load of debt have kept the stock price low as well, and with the stock trading at around 3 times earnings, it's pretty clear that Wall Street sees absolutely no value in Great Lake's ability to consistently grow revenues. In fact, the stock currently has a price to sales ratio of just 0.09. If solid revenue growth and consistently positive earnings were not enough to wonder why this is a 75 cent OTC BB stock, two very large recent developments that have not yet influenced the lightly traded issue may raise your level of bewilderment. These developments address both the earnings growth and debt concerns. The company has had about 14 million shares outstanding for the last decade, and the large debt load started in 2006 at around $68 million dollars. Over the past five years, they have paid that debt down to less than $40 million. Here's the first big development: A recent refinancing allowed the company to get back and extinguish over 5 million shares. This occurred during the last quarter of 2011, and the company is expected to report less than 9 million shares outstanding on its next filing. This means that all of the per share figures, including earnings, will improve dramatically. The second development is concrete evidence that air traffic was up big time for the second half of 2011, and looks to stay strong for 2012. The company earned 13 cents per share during the third quarter of 2011, and has reported stronger passenger traffic during the fourth quarter than what was seen last year. The aviation industry as a whole has also backed up this passenger growth story. The company has a much better balance sheet than it did a few years ago, is seeing a major increase in passenger levels, has ridiculously low valuations that will be forced even lower by having a third less shares when the next filing comes out in early April and the oil market is showing slightly less volatility than in recent years. This is where we usually ask, “what is the catch?” The stock is very lightly traded and judging by the lack of activity, is flying completely under the radar given its tiny size in relation to an enormous industry. So if you can stomach the risk associated with potentially having to wait for trade executions, consider Great Lakes Aviation a rarity among sub-dollar unlisted stocks. |
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