This is a FLYR overview I put together as part of a discussion on the company from another thread. I thought it might have some value here as well.
It's reprinted below, but originally appeared at:
exchange2000.com
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Dale,
I agree that FLYR is a screaming buy at its current level. I have identified four primary risk factors that I think have held down the price of this stock--.
(1) FLYR IPO'd as the market was starting to tank last summer. It was part of a complex restructuring of U.S. Office Products, its parent company, which baffled the Street and basically turned investors off. FLYR was expected to price at $11-13 . . . ended up pricing at $9 and finished off by almost a dollar its first day of trading. All but one of the U.S. Office spinoff companies tanked upon going public, mostly because the IPO market was weak at that point and because nobody could figure out what the hell U.S. Office was trying to do. I think FLYR has continued to suffer a stigma from these beginnings, which were not so much its own fault, but a combination of bad timing and a poorly conceived IPO strategy by the parent company and its underwriters.
(2) FLYR has not enjoyed much "organic" growth to the top line. This actually is a result of the company's long-term strategy, which now emphasizes acquisitions and economies of scale maintained across the enterprise. In my opinion, FLYR has correctly calculated that size matters in the travel-management industry: larger companies can negotiate significantly more favorable travel packages with their providers, as they purchase services in quantity. FLYR committed itself to rapid expansion through acquisitions so it could gain pricing power, which is crucial in an industry where travel providers are putting the squeeze on agents and management companies. In line with this strategy, FLYR has also committed itself to achieving efficiencies through the rapid and full integration of its component parts. FLYR's strategy is meant to have a direct impact on the bottom line, which isn't sexy but which ultimately is what counts: pricing power and economies of scale are going to maintain profit margins in this industry where profit margins are under severe pressure. FLYR management has said that it will turn to the problem of organic growth at a later stage of development, after the company has reached a certain critical mass through acquisitions and enterprise-wide integration.
(3) FLYR's ability to maintain its acquisition drive has been called into question. Last fall, in the midst of the global credit crunch, FLYR tried to do a deal to expand its credit line and was unable to get it done. Now, FLYR is working with Salomon Smith Barney and NationsBanc Montgomery Securities, Inc., to secure a $100 million credit facility. FLYR CEO Edward Adams has told a Dow Jones reporter (in a DJ News Service article) that "we've been assured that we can get it done." This will be a big boon on the Street, because analysts reduced projections for FLYR's top-line growth when it was unable to do the earlier deal. Adams said, in the same article, that he will not make acquisitions using FLYR stock until the price has reached at least $12-14 per share: "We just think that it's tremendously undervalued."
(4) For some time, the Street has been wondering how travel-management companies would maintain profit margins, given that the airlines are cutting commissions for sales by outside agents. FLYR has responded to this problem very shrewdly, I think: they generate most of their revenues by charging their clients directly, rather than by relying directly on commission rates from travel providers. They emphasize their ability to deliver value-added services to clients, and they charge clients directly for those services. This has made FLYR far less dependent on commissions than had been the case just a year or two earlier. This strategy has led to some "churning" in their client base: FLYR has lost some contracts because they're now essentially charging clients more for their services, to offset the revenue lost from the airlines. But FLYR maintains that these losses have been limited and that the bulk of their clients understand the value that FLYR brings to the table. I'm convinced that this is the appropriate survival strategy in the face of declining commissions, and applaud the company for realizing so quickly that they had to take dramatic action to offset declining commission rates. I believe the Street hasn't yet appreciated this move at all.
Having said all this about the risk factors, I nonetheless believe the potential upside here is tremendous: FLYR is a solid value play with a compelling story (Internet, rapid growth) and a number of "catalysts" on the near-term horizon. Trailing EPS was $0.42 (P/E = 14.6). FY99 projected EPS is $0.71 (P/E = 8.6 for 68% growth). FY2000 projected EPS is $0.99 (P/E = 6.2 for 40% growth). EBIDTA is $2.69 per share, versus current price of 6 1/8. Book value is $8.97/share. Trailing revenues were $120 million (P/S = 0.66). Projected FY99 revenues are $190 million (P/S = 0.42, 58% growth); projected FY2000 revenues without the credit facility are $240 million (P/S = 0.33, 26% growth) and with the credit facility are $290 million (P/S = 0.27, 53% growth).
Catalysts include the following:
(1) Upcoming earnings on Tuesday, February 23. Projected quarterly EPS is $0.06 (the quarter included November and December, which is the slowest time of the year for business travel). FLYR has had upside earnings surprises the past two quarters: 19% in July 1998 (0.19 actual versus 0.16 estimated) and 33% (0.20 actual versus 0.15 estimated) in October 1998.
(2) Centralized Navigant Web site under development and due for public release during the first quarter of this calendar year. Navigant has 15 travel Web sites and an extranet that it uses to help manage client relationships. Its aim is to draw these online resources together in a more coordinated way, using its proprietary AQUA quality-control software as the backbone.
(3) FLYR is attempting to finalize its credit expansion during the first quarter of this calendar year. Street analysts will respond favorably to this, as it will spur continued top-line growth.
For people who like to "time" the market, it's hard to imagine a better opportunity than FLYR provides right now, with all of these significant developments expected to come along very soon.
Sources:
For WSJ/Barron's subscribers, there's an excellent three-part series on FLYR by the Dow Jones News Service (January 11, 1999). Obviously, Yahoo! and Hoover's offer good starting points for DD. SEC filings, including the S-1, which provides historical financial information dating back several years, are available at:
freeedgar.com |
