ExpressJet (XJT)

[downsideup]

The short term problem at XJT is less an operational issue than a valuation issue. Its seems everyone expects that the measures XJT is taking now by cutting non-profitable operations will work, and will return XJT to profitability by the last calendar quarter this year. The problem is still the outstanding debt and the lack of any useful resolution, leaving only an unknown risk of dilution. There seems little interest in addressing value until the share dilution risks are known, or until the impacts on the business of any dilution are known.

Note on the Yahoo board today that there is mixed bag in a couple of new inputs from ratings agencies.

Morning Star upgraded XJT from three to four stars... but see what S&P says now:

09:51 am ET ... S&P REITERATES HOLD RECOMMENDATION ON SHARES OF
EXPRESSJET HOLDINGS (XJT 0.41***): We are positive on news that XJT will discontinue all branded flying and return those planes to lessors. We think XJT should focus on what it does well, which is providing regional feed for Continental (CAL 9.75***) and others. We think this move will restore cash generation and makes a return to profitability more likely. However, this enthusiasm is offset by concerns about likely sizable share dilution from recent decision to use stock to cover a call provision for convertible debt and the recent loss of Delta's business. We are cutting our target price to $0.50 from $1.50. /J.Corridore"

The rest of what matters, then, is the resolution of the debt issues. If the debt holders want to play hardball on conversion, that will create problems for shareholders to the degree that management just rolls over and allows that. The question of the resolution on the debt issue will boil down to the range of alternatives... the degree to which cutting back on operations liberates cash, the degree to which having jets freed up will enable alternative uses, or curtail lease obligations, and the degree to which XJT is able to rely on Goldman to provide other financing options if XJT were to use cash to satisfy their debt obligations. S&P has it right. If XJT can't dodge the dilution risks, there will be a massive transfer of value to bond holders... and little reason for investors to trust XJT shares will have any future value above that they have now. Layer over that the still developing issues of labor costs... and economic uncertainties. The plan in place sounds good... but has the impact of putting all of XJT eggs in the CAL basket. If the economy goes off more than it has, and the majors have more problems than it seems the do now, you have to note that XJT risks still include all the business risk that CAL has. If CAL goes belly up... ???