Airlines 26 Jan 2007 04:50 am
As reported Midwest Airlines’ (MEH) board of directors told shareholders to not give into AirTran’s (AAI) latest offer of $13.25/share. With the recent fall in AirTran’s stock Robert W. Baird & Co. put the price of the deal at $12.95/share.
With earnings of $0.29/share for 2006 that gives Midwest a price/earnings (P/E) ratio of 43. That’s quite high for an airline, but not as high as AirTran’s P/E of 83. It’s not unreasonable to see Midwest garner a P/E of 15-20. In their conference call presentation Midwest predicted 2007 earnings per share would be $1.70/share, a 93% increase from 2006. Based on management’s expected 2007 earnings Midwest’s stock could get into the 20s-30s. Yet AirTran only wants to pay $13.25/share. Midwest CEO Timothy Hoeksema doesn’t blame AirTran for trying saying, “It’s no wonder AirTran thinks we’re a good company to try to buy. We think we’re a great company for our shareholders to own.”
The big “if” is Midwest meeting its lofty expectations. It depends on the price of oil and the airline increasing passengers by 15%. Robert W. Baird & Co. is skeptical. They want more details on how the company will increase earnings. Regional flights between Milwaukee and Duluth, MN won’t do the trick.
Suppose Midwest doesn’t earn $1.70/share in 2007 but only the $0.89/share analysts expect. That would put the stock’s value at $13-17 range still better than the offer from AirTran. If AirTran wants Midwest they’ll have to up the ante which will be difficult with a falling stock price.