Continental Wine

There may still be good wine left at the Continental party.

Continental Airlines' (CAL) share price (SP) has increased 150% in the last six months. Wow! A bit late to consider getting into the game then? I am not so sure.

I have just done a back-of-an-envelope estimate to see where the SP could go by the end of the year. Given a 2007 EPS of $3 and a forward PE of 15 the SP could go to 45 by the end of the year for a 63% increase.

Then I did something interesting. Using the Q4 2005 report I changed the fuel expense to be the same as that in Q4 2004. Suddenly annual EPS was $8! I am not saying that the oil price is going to go below $50 this year but it just shows the sort of profits that are possible if the price plummeted.

Of course the opposite could happen - oil could go to $80, there could be another terrorist attack or a US recession. Any of these events would hit CAL hard. By owning airline shares I would be exposed to all sorts of negative possibilities. I would also be exposed to the possibility of the oil price decreasing slightly and none of the above catastrophes happening which would probably lead to a 100% gain by the end of 2006.

So am I tempted? Yes! But buying CAL would mean selling GOOG to raise the funds.

I think GOOG can end 2006 on a SP of $480 for a 31% increase. However I think the heady days of 2005 are behind us for a while. Out of all the rubbish printed about GOOG in the last few months one very important thing was said. George Reyes (the CFO)explained that the explosive growth in 2005 was due to an exercise to tweak the revenues from sponsored search, an exercise that is almost complete. Since sponsored search and Adsense are almost the sole sources of revenues, growth in 2006 should be more organic than explosive. This is factored into most analyst estimates but perhaps the potential for blow-out quarters is not there any more.

I will look into CAL more and no doubt make the wrong decision in the next week or so!