Company Overview
SkyEast Airline (the Company for brevity) is a regional airline operating in the USA offering 1,500 flights a day to 117 cities in 31 states. Majority of these flights are carried through two bigger airline companies 40 under Delta and 59 under United. The companies, amongst themselves have worked out the logistics by which they can cater their services to the transporting public.
With the terrorism threats and the fluctuations of the economy, the airline industry has been a very volatile one. Some airline companies have reported net losses, largely because of extended economic recessions. Fuel price-hikes also have not been a friend to the industry.
Competitive Analysis
Threat to Entry As of this moment, or perhaps in every other time, new entrants to airline industry will not be a problem. The costs associated with running one can easily amount to several third-world countries annual taxation revenues and not many have this kind of capital. One that can be feared, however, is a merger between two small airlines to expand their respective operations and this will likely affect the Companys clientele.
Rivalry between Existing Competitors The rivalry is fierce. Consumers will always look for the best prices and the best of schedules. Online companies like Travelocity and Priceline are their friends in doing this and these companies will compare side by side the services the Company offers and others as well. Price will always be a driver as well as good scheduling strategies.
Pressure from Substitute Products The USA is one big lump of land. Aside from islands like Hawaii and Alaska, the rest of the mainland is accessible by car. There are a lot of people out there who will prefer a long coast-to-coast drive rather than pay for round trip plane fare.
Bargaining Power of Buyers all services of the Company are for the buyers. Every service must be designed to fit their needs and what they can afford. The Company must always hear what these buyers say so they remain loyal to their choice of airline.
Bargaining Power of Suppliers currently, there are two companies that can be called suppliers of commercial planes and those are Boeing and Airbus. With the volatility of the airline industry, Boeing andor Airbus must only be glad to produce more aircrafts and they do not seem very threatening to the Company so far.
Financial Data Presentation
Return on Assets (ROA) Total RevenueTotal Assets x Net Profit Total Revenue
20042003Percentage ChangeROA 1,1441,662 x 701,144ROA 8881,529 x 66888Change (4.32-4.21)4.32ROA 4.21ROA 4.32 2.55
Return on Equity (ROE) Net Profit Average Shareholders Equity
2004 (from the data, 2003 ROE cannot be computed)
ROE 1,144 (779709)2
1.54
Leverage Ratio Total AssetTotal Equity
20042003Percentage ChangeLR 1,662 779LR 1,529709Change (2.17-2.13)2.17LR 2.13LR 2.17 1.84Liquidity Ratio Current Ratio Current AssetsCurrent Debts
20042003Percentage ChangeCR 712176DR 670152Change (4.41-4.05)4.41CR 4.05DR 4.41 8.16
Looking at these ratios, there are not any material changes from 2003 coming to 2004. However, despite the little change, it is very clear that 2003 is slightly better than 2004 in terms of these ratios standards. Amongst the notable things are that he companys ROA has declined by 2.54. The Company is using more debt than capital in financing its assets hence interest expenses must be very costly and for the short term, the company has enough ready cash to fend off its more-pressing creditors.
Compared to the industry as a whole, in terms of ROA and ROE, the Company is within the range of average performance, still retaining positive returns for every dollar spent on assets and every dollar investors capitalize on equity. The leverage ratio shows the Company is at the top of the industry, having twice the number of assets the capital can provide this also means the company is more in debt than it is financed by common stock. The Companys current ratio is remarkable, being 3 times more than the industry average. It appears the Company has enough ready cash or at least assets that can be easily converted to cash to finance its operations and liquidity. For a company this can only be good as this would retain them their suppliers and immediate creditors trust. However, the 8.16 decline in this ratio from 2003 to 2004 must be looked upon by top managers as this might likely have stepped outside of the Companys materiality threshold. The last thing they want is have creditors doubt their liquidity as currently, in terms of these financial evaluators, liquidity is the only aspect where the Company has a clear advantage.
A stocks beta indicates how risky an investment on that particular stock is. A high beta means high risks of both losing the investors money and getting returns. A lower beta is generally more stagnant and less-risky.
Equity Valuation
PE Stock priceEPS
2004PE 19 1.27PE 14.96Once again, the Companys PE is average, as compared with the industry. It is within the middle of the range. The PE gives the public an idea of how much the investors are willing to pay for each stock of the company. The Companys PE is not by any means exceptional but at least it is within the industrys range. However, being average only means that there are companies at the top of the spectrum that the investors would prefer over the Company. In terms of competition, the Company still has a lot of work to do if it wants to be the number one company the public would want to invest in.
Two-step equity valuation
Compute for required return of investment using the CAPM.
Required return of investment 5 1.3 (9-5)
10.20
DDM
SHAPE MERGEFORMAT
Value of Common Stock
0.5(1.20).102-.201-(1..21.102)30.5(1.2)3(1.07)(.102-.07)(1.102)3
-6.12245 -0.29122 29.7541.338273
1.782956 22.23313
24.01608
Currently, using two-stage DDM, the value of the Companys common stock is 24.
Investment Conclusion
Using the two-stage DDM model, the value of the Companys stock is 20.89 (24.02-19)24.02 higher than the current market price of 19. Theoretically speaking, this makes the company a good investment. However, before the investor actually spends for this kind of stock, it is imperative that the investor took in a lot of considerations. Currently, the airline industry is not a good industry to invest in, despite the fact the Company is promising growth within the next three years. The investor has to weigh in the pros and cons as no matter how good the individual performance of the Company is, its performance is highly dependent upon that of the Airline Industry. The investor may want to invest elsewhere. However within this industry, the company at best is average but is promising very high returns for the future as to make the investment worthwhile so the investor is essentially safe in investing with SkyEast.
SkyEast Airline (the Company for brevity) is a regional airline operating in the USA offering 1,500 flights a day to 117 cities in 31 states. Majority of these flights are carried through two bigger airline companies 40 under Delta and 59 under United. The companies, amongst themselves have worked out the logistics by which they can cater their services to the transporting public.
With the terrorism threats and the fluctuations of the economy, the airline industry has been a very volatile one. Some airline companies have reported net losses, largely because of extended economic recessions. Fuel price-hikes also have not been a friend to the industry.
Competitive Analysis
Threat to Entry As of this moment, or perhaps in every other time, new entrants to airline industry will not be a problem. The costs associated with running one can easily amount to several third-world countries annual taxation revenues and not many have this kind of capital. One that can be feared, however, is a merger between two small airlines to expand their respective operations and this will likely affect the Companys clientele.
Rivalry between Existing Competitors The rivalry is fierce. Consumers will always look for the best prices and the best of schedules. Online companies like Travelocity and Priceline are their friends in doing this and these companies will compare side by side the services the Company offers and others as well. Price will always be a driver as well as good scheduling strategies.
Pressure from Substitute Products The USA is one big lump of land. Aside from islands like Hawaii and Alaska, the rest of the mainland is accessible by car. There are a lot of people out there who will prefer a long coast-to-coast drive rather than pay for round trip plane fare.
Bargaining Power of Buyers all services of the Company are for the buyers. Every service must be designed to fit their needs and what they can afford. The Company must always hear what these buyers say so they remain loyal to their choice of airline.
Bargaining Power of Suppliers currently, there are two companies that can be called suppliers of commercial planes and those are Boeing and Airbus. With the volatility of the airline industry, Boeing andor Airbus must only be glad to produce more aircrafts and they do not seem very threatening to the Company so far.
Financial Data Presentation
Return on Assets (ROA) Total RevenueTotal Assets x Net Profit Total Revenue
20042003Percentage ChangeROA 1,1441,662 x 701,144ROA 8881,529 x 66888Change (4.32-4.21)4.32ROA 4.21ROA 4.32 2.55
Return on Equity (ROE) Net Profit Average Shareholders Equity
2004 (from the data, 2003 ROE cannot be computed)
ROE 1,144 (779709)2
1.54
Leverage Ratio Total AssetTotal Equity
20042003Percentage ChangeLR 1,662 779LR 1,529709Change (2.17-2.13)2.17LR 2.13LR 2.17 1.84Liquidity Ratio Current Ratio Current AssetsCurrent Debts
20042003Percentage ChangeCR 712176DR 670152Change (4.41-4.05)4.41CR 4.05DR 4.41 8.16
Looking at these ratios, there are not any material changes from 2003 coming to 2004. However, despite the little change, it is very clear that 2003 is slightly better than 2004 in terms of these ratios standards. Amongst the notable things are that he companys ROA has declined by 2.54. The Company is using more debt than capital in financing its assets hence interest expenses must be very costly and for the short term, the company has enough ready cash to fend off its more-pressing creditors.
Compared to the industry as a whole, in terms of ROA and ROE, the Company is within the range of average performance, still retaining positive returns for every dollar spent on assets and every dollar investors capitalize on equity. The leverage ratio shows the Company is at the top of the industry, having twice the number of assets the capital can provide this also means the company is more in debt than it is financed by common stock. The Companys current ratio is remarkable, being 3 times more than the industry average. It appears the Company has enough ready cash or at least assets that can be easily converted to cash to finance its operations and liquidity. For a company this can only be good as this would retain them their suppliers and immediate creditors trust. However, the 8.16 decline in this ratio from 2003 to 2004 must be looked upon by top managers as this might likely have stepped outside of the Companys materiality threshold. The last thing they want is have creditors doubt their liquidity as currently, in terms of these financial evaluators, liquidity is the only aspect where the Company has a clear advantage.
A stocks beta indicates how risky an investment on that particular stock is. A high beta means high risks of both losing the investors money and getting returns. A lower beta is generally more stagnant and less-risky.
Equity Valuation
PE Stock priceEPS
2004PE 19 1.27PE 14.96Once again, the Companys PE is average, as compared with the industry. It is within the middle of the range. The PE gives the public an idea of how much the investors are willing to pay for each stock of the company. The Companys PE is not by any means exceptional but at least it is within the industrys range. However, being average only means that there are companies at the top of the spectrum that the investors would prefer over the Company. In terms of competition, the Company still has a lot of work to do if it wants to be the number one company the public would want to invest in.
Two-step equity valuation
Compute for required return of investment using the CAPM.
Required return of investment 5 1.3 (9-5)
10.20
DDM
SHAPE MERGEFORMAT
Value of Common Stock
0.5(1.20).102-.201-(1..21.102)30.5(1.2)3(1.07)(.102-.07)(1.102)3
-6.12245 -0.29122 29.7541.338273
1.782956 22.23313
24.01608
Currently, using two-stage DDM, the value of the Companys common stock is 24.
Investment Conclusion
Using the two-stage DDM model, the value of the Companys stock is 20.89 (24.02-19)24.02 higher than the current market price of 19. Theoretically speaking, this makes the company a good investment. However, before the investor actually spends for this kind of stock, it is imperative that the investor took in a lot of considerations. Currently, the airline industry is not a good industry to invest in, despite the fact the Company is promising growth within the next three years. The investor has to weigh in the pros and cons as no matter how good the individual performance of the Company is, its performance is highly dependent upon that of the Airline Industry. The investor may want to invest elsewhere. However within this industry, the company at best is average but is promising very high returns for the future as to make the investment worthwhile so the investor is essentially safe in investing with SkyEast.
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