By William Trent, CFA of Stock Market Beat

Small Cap Watch List 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.

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