9/27/2013

Tiny Deep Value Illiquid OTC Listed

GLUX: Great Lakes Airlines is a leading scheduled air service provider to rural communities in the Western US.  Incorporated in 1979 operating as an independent carrier and as a code share partner with United Air Lines, Inc. and Frontier Airlines, Inc. A codeshare agreement is an “aviation business arrangement where two or more airlines share the same flight. A seat can be purchased on one airline but is actually operated by a cooperating airline under a different flight number or code.” Source Wiki:

“The Company provides charter air services to private individuals, Corporations, and athletic teams. The Company services are marketed mainly by means of its internet web site, global distributions systems (travel agencies and travel agent web sites), its reservation call center. It competes for passenger traffic with regional and major air carriers and ground transportation. The Company also competes with other regional air carriers to receive EAS subsidies for providing air service to small communities. The Company’s main competitors, serving its same geographic markets with the same type aircraft, and with EAS subsidies, ceased operations. These airlines include Air Midwest, Big Sky Airlines and Skyways Airlines.” Source MSN


Valuation is cheap very cheap not only using an intrinsic model such as a DCF but relative valuation to its industry peers. GLUX has many positives so I will simply list many and follow with risks. 

Pros:
Trading at historical low valuations based on book value and sales. ROIC has been consistently strong. 12.79%(2009),11.37% (2010), 23.20% (2011) and 5.84% for 2012.

How tiny? Shares in the public float are only 3.57M with a current stock price of 1.00,total shares outstanding are 8.97M.
Management has done an excellent job of financially managing the company. Operationally I can’t provide much value.

P/B TTM = .2 versus the industry average of 2.70
P/S TTM =.10 versus the industry average of .60

Share count has been stable for many years with minimal executive costs. Chairman/Pres salary = 175K,CEO =158k,CFO =156K . These salaries are a small fraction of other Regional Airline executive salaries.Inside ownership is concentrated at 48%.

Financial performance over the past 5 years.
BV per share was –.20 (2006), 1.09 (2007),1.22 (2008), 1.67 (2009),2.03 (2010),4.05 (2011), 4.35 (2012), TTM 4.23
The big jump in per share BV was the result of a large reduction in the share count. They are the industry leader when using book value growth over the past 5 years.5 year annualized book value growth was 35.20%,EBITDA and Revenue growth over the same 5 year period was 11.40% and 14.40% respectively.

The 52 week return is -34.38% reaching its 52 week low this past week.

Major Risk: They derived approximately 47% of their total revenue from the EAS program. This government program is administered by the United States Department of Transportation (DOT). “The EAS program was instituted under the Airline Deregulation Act of 1978 (the “Deregulation Act”), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of “essential air service.” In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.”

These payments could be reduced or materially eliminated by changing the qualifying locations thus impacting their large dependence (47% of total revenue)the EAS program.

GLUX has also seen gross and operation margin compression. Fuel costs is another uncertainty that could reduce or eliminate profitability. The stock is very illiquid listed on the OTC with insider controlling 47% of the shares.

So if after looking further at the age of the fleet, future capital needs and other costs you must be willing to hold to realize fair value.

I purchased a few shares.

Statistical Data:

Current Price = 1.00
Market Cap: 9.42M ,Enterprise Value: 32.70M
Price/Sales: 0.07 ,Price/Book: 0.24
Enterprise Value/Revenue: 0.25, Enterprise Value/EBITDA: 2.77

Revenue (ttm):130.43M ,Qtrly Revenue Growth (yoy):-15.20%
Gross Profit (ttm): 70.71M ,EBITDA (ttm):  11.82M

Total Cash (mrq):2.74M ,Cash Per Share (mrq):0.31
Total Debt (mrq):  25.92M
Current Ratio (mrq): 2.26
Book Value Per Share (mrq):4.23

Operating Cash Flow (ttm):8.22M ,Free Cash Flow (ttm):3.75M

52-Week Change: -34.38%

52-Week High(Nov 2012):3.01 ,52-Week Low(Sep, 2013:0.96

Shares Outstanding: 8.97M ,Float:3.57M



Click for quotes on the regional Air Lines Below





2 comments:

johnheider1 said...

So many ways this can go to zero but, yeah, if it doesn't there is absolutely no downside.

ShadowStock said...

GLUX does have risk given their size, reliance on the EAS program and future fuel prices. But for me one can make an argument that it falls in that category, there are no bad assets just bad prices. The current price may represent an expected higher future price greater than further price erosion or permanent loss. I can’t know. I can look at the existing assets and potential future earnings based on historical results.

Thanks for the response. John