PNCL reported earnings of $2.7 million for the first quarter compared to $9.4 million for the first quarter last year. Several factors have caused PNCL’s bad earnings during the first quarter. They appear to be primary temporary in nature and PNCL should deliver 2009 free cash of between $70- $100 million. These temporary factors have caused PNCL’s stock price to decline nearly 50% from November and at the same time the long term has changed little. PNCL currently has over $4.50 per share in cash plus another $7 per share in auction rate securities and since the first quarter 07, nearly 25% of the stock has been repurchased. If the deferred revenue is added to book value and goodwill and intangibles are subtracted, adjusted book value is $13.81 per share. Pinnacle is trading for less then 50% of adjusted book value. I plan to buy more shares on Tuesday.
To avoid confusion I will call the parent company PNCL and the two subsidiaries (Pinnacle ) and (Colgan). Consolidated operating income was $6.7 million compared to $12.8 million last year which resulted in an operating margin of 3.3% and 7.1% respectively.
PNCL’s subsidiary, Pinnacle, had operating income of $17.7 million up from $15.4 million in 07. Pinnacle’s operating margin was 11.5% for the quarter vs. 10.7% in 07. In the call management stated that this year was the worst winter weather pattern in the history of the company. Penalties caused by the delays cost Pinnacle $2.5 million and management said that the delays cost Pinnacle another $2 million in lost revenue and other costs.
The Colgan operations had an operating loss of $4.9 million vs. break even in 07. Since Colgan’s contracts are "revenue pro-rata", they are effected by fuel prices. The 54% increase in fuel prices cost Colgan $4.2 million more then last year. Also Colgan’s operations are seasonal with the first and fourth quarters being the worst. Management expects Colgan to be at a loss for the year. Significant cost cutting initiatives are planned to return Colgan to profitability. These initiatives include rebidding the Essential Air Services flights, relocating nine markets from Pittsburgh to Washington Dulles, relocating maintenance hubs to eliminate ferry flights, implementation of fuel saving initiatives, simplifying the maintenance structure, and eliminating the unprofitable Beech 1900 fleet. Management stated in the call that if these initiatives don’t return Colgan to profitability then they will take measures to reduce of eliminate the "revenue pro-rata" contracts and attempt to get the planes into capacity purchase agreements. If Colgan were to exit the current contracts it would incur large one time costs.
Pinnacle had operating income of $17.7 million, Colgan reported an operating loss of $4.9 million and PNCL had overhead expenses of $6.1 million. Overall operating income was $6.7 million down from $12.8 million last year. To summarize, the results were affected by the poor results at Colgan which was primarly the results of fuel prices ($4.2 million), penalties due to weather ($2.5 million) and lost revenue due to delays ($2 million).
Five CRJ-900's entered service in the first quarter as part of Pinnacle’s contract with Delta. Ten more CRJ-900's will be delivered by January 2009 and Delta has the option to add up to seven more. Six Q-400's entered service during the quarter as part of Colgan’s contract with Continental. Nine more Q400's are scheduled to be delivered by the third quarter of 08, eight more in 09 and two in 2010 for a total of 19 by 2010. Continental has the option to add up to 20 more Q400's. The Q400's use 28% less fuel then a comparatively sized regional jet.
Disclosure: I own Pinnacle.
Sunday, May 25, 2008
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2 comments:
I think the disapointing results of Pinnacle's purchase of Colgan shows how inexperienced Pinnacle's manegement is at capital allocation and with $76 million in cash and $126 million in ARS whose to say that they don't blow it again?
The main reason that Colgan was purchased was to bring on Continental and Delta as partners. With the acquisition by Pinnacle, Colgan was able to sign contracts with Delta to operate CRJ-900's and Q400's with Continental. Colgan's poor performance during the quarter was due to both seasonality and the 54% increase in fuel costs. Management couldn’t have foreseen the huge rise in gas prices. Pinnacle and Colgan management have initiatives planned to return Colgan to profitability and if Colgan doesn't return to profitability, Colgan's revenue pro-rata operations will be canceled and turned over into capacity purchase agreements. The quality of Pinnacle's management when it comes to capital allocation can be seen by the recent huge share buybacks at a very undervalued price and managements avoidance of the riskier (pro-rate) type business that has gotten many of their competitors into trouble.
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