Valujet Soars, But Don't Bail Out

Nothing flies like success. And against great odds, ValuJet Airlines (VJET)

is soaring: Since going public in June, 1994, its shares have rocketed from 6

3/4 to 46 1/2. Predictably, some investors are getting edgy. Is it time to

bail out?

Not by a long shot, say the pros who are still accumulating shares.

ValuJet's success in the low-fare, short-haul business, says one hedge-fund

manager, has attracted the big airlines--which have failed in such markets.

So ValuJet, whether management likes it or not, is a "very attractive target

for takeover or merger," he adds. The stock, he believes, is cheap at this

price, thanks to its fast growth, and could be worth 60 in a merger. From its

Atlanta hub, ValuJet serves 25 cities in 17 states, and from Washington's

Dulles, 10 cities in 5 states. On nearly all runs, it competes with Delta Air

Lines. Another big rival is American--and Southwest is slated to enter some

Florida markets next year.

ValuJet has told analysts and money managers it isn't for sale--in part

because it's profitable enough to finance expansion. But you can't deny,

argues the hedge-fund manager, that "it could be for sale at the right


With or without a takeover, the company is undervalued, many analysts

maintain. "ValuJet is beating the pants off the rest of the industry," says

investment manager Graham Tanaka. He's counting on ValuJet to enhance the

gains of Tanaka Capital Management, whose portfolio has scored a heady 48.7%

this year.

"ValuJet has exceeded all expectations," he says. Using refurbished

DC-9s on no-frills flights at 40%-to-60% discounts through a ticketless

reservation system, ValuJet has achieved load factors of 78%--vs. an industry

average of 64%, notes Tanaka.

Since ValuJet started operations two years ago, analysts have raised

earnings estimates several times to keep up with growth. "The profitability

has been a result of a strategy to exploit a heretofore-ignored

subset--customers who would probably not travel at all without the low

fares," says analyst Vivian Lee of NatWest Securities. That's how it manages

to thrive, she adds, in thinly traveled markets: Its formula is

"limited-frequency service offering everyday low prices anchored by a

low-cost structure."

Tanaka thinks ValuJet will beat conservative earnings estimates of $1.77

to $2.05 a share for 1995 and $2.14 to $3 for 1996. He figures the company

will make $2.45 this year and $3.50 next.

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