With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

The Board of Directors of Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp. (PNCL) authorized a new share repurchase program to acquire up to $30 million of the Company’s outstanding common stock. If executed, the share count could be reduced by as much as 8%, and there doesn’t seem to be any reason not to execute on it. As the company noted:

Pinnacle holds $42.5 million face amount of unsecured claims against Northwest Airlines (NWA), and is evaluating options to monetize this non-core asset. Pinnacle’s Board of Directors may increase the amount authorized under the share repurchase program in future periods, depending on the Company’s working capital needs and its ability to monetize its remaining unsecured claims against Northwest.

In addition to the recent growth opportunities, Pinnacle’s low-risk strategy requires little in the way of capital expenditures. Over the last three years, Pinnacle has generated a cumulative $86 million in cash flow from operations and needed only $21 million for capital expenditures. As a result, it ended 2006 with $72 million in short-term investments and a relatively low (for an airline) $121 million in debt.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp. (PNCL) reported first quarter 2007 net income and earnings per fully diluted share (”EPS”) of $9.4 million and $0.38, respectively. Analysts had been expecting the company to earn $0.40. However, thereduction in net income was caused primarily by the contractual changes in the airline services agreement with Northwest Airlines, Inc. As we noted before, the long-term impact of those contractual changes are largely offset by a new agreement with Delta.

Shares are up ever so slightly on the news.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp (PNCL) issued the following News Release:

Pinnacle Airlines Corp. (PNCL) announced today that it has entered into a new capacity purchase agreement with Delta Air Lines (DNTNQ) to operate 16 CRJ-900 aircraft as a Delta Connection carrier. Pinnacle currently expects that the aircraft will be operated by its wholly owned regional jet subsidiary, Pinnacle Airlines, Inc.Under the agreement, Pinnacle will directly acquire and finance the aircraft. Pinnacle will take delivery of the aircraft between November 2007 and July 2008, with scheduled service as a Delta Connection carrier beginning in December 2007. The term of the agreement is for ten years.

The “capacity purchase agreement” sounds similar to that described in another article. The fact that the capacity has been sold in advance reduces Pinnacle’s risk.

Furthermore, the deal almost exactly offsets the number of aircraft the company failed to get from Northwest (NWA) due to the breakdown in pilot negotiations. Within a week, what looked like a modest setback is now at least a break-even.

According to an SEC Filing, Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines (PNCL), an Amended and Restated Airline Services Agreement with Northwest Airlines (NWA) required Pinnacle and the Airline Pilots Association to reach a new collective bargaining agreement. Since they did not, Northwest intends to transition the 15 aircraft delivered to Pinnacle in the first quarter of 2007 to one of Northwest’s wholly owned subsidiaries.

Since the election was optional on Northwest’s part, we assume it was more in their interest than in Pinnacle’s. However, in lieu of the aircraft Pinnacle is entitled to the full amount of its stipulated unsecured claim in the Northwest bankruptcy proceedings. The Company still retains $42.5 million of this unsecured claim, and may monetize it in the near future.

On a dreary, rainy day in New York we woke up to find that Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines (PNCL) has reported that one of its planes was involved in an accident:

Pinnacle Airlines flight 4712 operating between Minneapolis - St. Paul and Traverse City, Michigan has been involved in an incident at Traverse City. Flight 4712 departed Minneapolis at 9:44 p.m. and landed in Traverse City at 12:43 a.m. The aircraft, a Canadair Regional Jet, was carrying a crew of 3 and 46 customers. Upon landing, the aircraft received no braking action and came to a stop off the end of the runway. There are no injuries reported to passengers or crew.

We may be overreacting to the local weather, but it seems like a day to stay inside. Thank goodness nobody was injured.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines (PNCL) announced the following in an 8k Filing:

Bombardier Aerospace announced today that Pinnacle Airlines Corp. of Memphis, Tenn. has signed a contract to acquire 15 Bombardier Q400 74-seat turboprop airliners. The transaction also includes conditional orders for another 10 Q400 aircraft and options on an additional 20.The value of the 15 firm ordered aircraft, based on the list price of the Q400 aircraft, is approximately $381 million US. The value could rise to $1.2 billion US if all conditional orders and options are exercised.

Pinnacle typically operates under a fairly safe business model under which it leases most of its capacity to major carriers for whom it provides regional connections. Still, there are some residual risks and capacity additions always bring further risk of excess supply. But even though risks remain, the business model is one of the safest in the airline industry.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines (PNCL) issued the most enjoyable press release we’ve seen in a while:

Pinnacle Airlines, Inc., a subsidiary of Pinnacle Airlines Corp. (PNCL) and the United Steel Workers Local 772, representing the airline’s flight attendants, announced that a four-year contract has been ratified by the membership.

We had no idea how much smelting is done by flight attendants.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp. (PNCL) reported earnings:

Pinnacle Airlines Corp. (NASDAQ: PNCL) (”Pinnacle” or the “Company”) today reported fourth quarter 2006 earnings per fully diluted share (”EPS”) of $1.67, as compared to EPS of $0.45 during the fourth quarter of 2005. Net income during the fourth quarter of 2006 was positively impacted by an after-tax benefit of $26.1 million, or $1.18 per share, associated with the settlement with Northwest Airlines (”Northwest”) and the related revaluation of the Company’s reserve for items owed by Northwest. Net income was also affected by a $1.5 million charge, or $0.07 per share, to increase the Company’s reserve related to uncertain tax positions. Excluding these two items, Pinnacle’s net income and EPS for the fourth quarter 2006 would have been $12.3 million and $0.56, respectively.

Which, as it happens, was a penny shy of consensus estimates. It appears the problem started at the top line, as the $205 million in operating revenues was about $5 million lower than expected. The shortfall was due to the shifting mix of passengers, miles flown per trip and overall load. Still, the company has several positives going for it, which management was quick to point out on their conference call:

A few of the key events we did complete the negotiations of our ASA with Northwest. Several key components came out of that. The 2 most important, we do have our freedom to operate outside of the Northwest family and we were able to complete the claims sale of $335 million.

Also of great significance is acquisition of Colgan Airlines, Colgan Air. We did acquire a strong operating airline, but more importantly, Colgan has done a very good job of developing relationships with other carriers and that’s something that we believe will pay dividends in the future.

The right now dividend, first in Colgan, as you know we also signed an agreement with Continental Airlines to operate the Q400 aircraft for Continental out of the Newark Airport, Liberty Newark Airport and we will be assigning those aircraft to Colgan.

So the fourth quarter is really the start of 2007, which will definitely be a year of transition for Pinnacle as we move from a company who is fairly restrained to a company that’s growing in several different areas.

They are definitely right about the transition. As long as they deliver on the growth promise, investors should end up happy.

Small-cap Watch List member Pinnacle Airlines (PNCL) issued its January traffic data:

During January, Pinnacle transported 690,559 Customers, 5.6% more than the same period in 2006. Passenger Load Factor was 65.0%, a decrease of 4.0 points over January 2006 levels. For the month, Pinnacle flew 484.5 million Available Seat Miles (”ASMs”), a 4.5% increase when compared to the same period in 2006. Pinnacle flew 315.0 million Revenue Passenger Miles (”RPMs”), a decrease of 1.5% over January 2006.

How did passenger miles fall when passengers were up? Shorter trips:

The average length of a Pinnacle flight was 454 statute miles compared to 477 statute miles in January 2006.

How did load factor fall with passengers up? More seats:

Throughout 2006, Pinnacle completed the conversion of its aircraft operating with 44 seats to 50 seat aircraft. As of January 31, 2007, all aircraft in the Pinnacle Airlines fleet, with the exception of the nine aircraft added to our fleet during January 2007, operated with 50 seats, providing more passenger lift to Northwest Airlines. As previously announced, the amended Airline Services Agreement with Northwest provides that Pinnacle receive back the fifteen aircraft removed from its fleet during 2005. Nine of these aircraft became part of Pinnacle’s active fleet during January 2007. Consequently, Pinnacle ended the month with 133 aircraft compared to 124 for the same month of 2006. The remaining six aircraft will become part of Pinnacle’s active fleet in February, increasing the fleet size to 139 aircraft.

As we recently pointed out, Pinnacle continues to add capacity, but their revenue arrangements with the major carriers mean that the revenue stream is more predictable. Still, we are somewhat new to the name, and any comments or clarifications would be helpful as we get up to speed.