No Room for Error at Air T

Air T (AIRT) has all the makings of a grossly undervalued stock. It has a P/B of .7, a P/E under 5, and a net cash position (cash minus debt) of over $7 million, while the stock trades for $18 million. The company has been able to maintain strong levels of profitability throughout this downturn, and even pays a dividend yielding over 4%. It operates in three distinct segments which, as we've discussed, helps diversify away risk. While AIRT could very well turn out to be a terrific long-term investment, further study indicates that there are some serious risks that could also dampen future returns.

First of all, 100% of AIRT's revenue in its largest segment is from one customer, FedEx (FDX). AIRT is charged with operating 82 aircraft for Fedex, but these contracts can be cancelled by FedEx with just 30 days notice. While it is conceivable that FedEx will not cancel these contracts for several years, 50% of AIRT's consolidated revenue is reliant on this fact!

In the other segments, the situation is not dissimilar. About 25% of AIRT's consolidated revenue comes from the US military for the manufacture of airplane de-icing machines. While these are produced under contract, and have been since 1999, those contracts expired in June of this year. The military has issued a request for proposal, but the jury is still out on whether AIRT will be able to renew.

Finally, AIRT receives a majority of its revenue in its third segment, maintenance and support, from Delta Airlines (DAL). While these services are also performed under contract, this contract is set to expire in just over one year.

While AIRT is currently showing strong earnings in its most recent periods, these earnings may have peaked: the company's backlog at March 31st, 2009 was just $8 million, compared to $25 million in the year-ago period. Furthermore, an examination of the risks reveals that while the stock may trade at low levels relative to AIRT's earnings power, that earnings power does not have a whole lot of downside protection.

Disclosure: None

Comments

[inSearchOfV...:]

Thanks for the article Saj. I was looking for some source of opinion on AIRT and you bring up some interesting points. I think AIRT is undevalued. But its revenue dependence on a few customers is worrying. I like the dividend yield growth and the dividend yield itself that AIRT has maintained over the years.

Jul 17 08:35 AM

[hokieincane...:]

Saj, your analysis is both shallow and incompetent!!

You report (on July 17) that the 5-year Air Force contract expired last month (the second consecutive 5-year contract awarded to AIRT). What you fail to report is that on Monday, July 13 the Air Force awarded a new contract to AIRT (that carries a first year (of five) value based on BEQ's of $15.4 million). It is a contract that will become five years if the Air Force exercises all four one year options (which it has always done in the past).

You say that the March 31 backlog had declined, but you fail to report that the Air Force placed an order in early May for $11.5 million or to consider the different timing of Air Force ordering in 2009 versus 2008.

You point out that FedEx might cancel the air freight services contract, but you fail to tell the reader how long this contract has run. And, FedEx cannot perform these services more cost effectively in house (the unions would swarm). This contract is a great value for FedEx, and as long as AIRT continues providing this value and quality, the contract will go on and on.

You report that Delta (former NWA part) is the major customer for the Global Aviation Services division, but you fail to point out that NWA was the first (and major) contract that launched this division just about two years ago. You failed to report how AIRT has grown this business by adding both new customers and new stations. I will assure you that Delta cannot perform this work in house as cost effectively as can Global. And since the DAL maintenance staff is non-union, the end result may be that DAL will cost effectively outsource this work at some stations, and without dealing with any union bosses in the process.

Jul 17 01:28 PM

[jg1945:]

agree with the above. Fed Ex, and Air Force keep renewing, and that dividend is sweet.

Jul 17 02:31 PM

[Saj Karsan:]

Hi guys,

Thanks for your comments.

Sorry about not mentioning the most recently announced AF contract. Between the time I wrote the article and scheduled it for publishing, the contract was announced. However, it should be noted that the contract can be cancelled after one year, so the revenue risks discussed in the article, both related to that contract and related to the other segments, still remain going forward.

Jul 19 06:49 PM

[hokieincane...:]

Saj, your comments are weak and not responsive to the points made above!!

You should know that this is an internet blog and not a monthly business magazine with a cut-off date three and a half weeks before the date on its cover. You should "look around" before you push the "publish button" and not more than four days before doing so. If the "built in delay" for publishing is four days or more, then SA needs to get out of this business.

I believe that you have established a "template and matching headline" and then covered each of your supporting points using the most pessimistic of scenarios and thereby misleading the reader. 1. You don't point out that the Air Force has not failed to exercise its one year options for more than the last 10 years. 2. You don't point out that AIRT had done contract work for FedEx since 1980 with that same "30 day cancellation clause" in force. 3. In picking March 31 for backlog comparisons, you fail to recognize or acknowledge the change in timing of Air Force ordering for 2009 vs. 2008. 4. You distort the Global Aviation Services (GAS) division story; this operation only started in September 2007 with NWA as the launch customer. NWA previously had savaged its maintenance unions until they "whimpered like a young puppy, with its tail between its legs while wetting the rug." My point was that DAL will more likely outsource more of this work to GAS at certain stations than to take the former NWA work in house or award a contract to a competitor of GAS.

Saj, your analysis is biased, as you have selected only negative scenarios that probably have a low probability of occurence either individually or in concert.

Saj, IT'S TIME TO STAND AND DELIVER.!!!

Jul 22 10:35 AM

[Saj Karsan:]

Hi Hokie,

I did not respond to most of your comments because they were not relevant to the article. The article is about AIRT's revenue risks. I'm not telling investors that AIRT is a bad investment; in fact, I mentioned its strong profitability, its dividend yield, and suggested it could turn out to be a terrific long-term investment. But investors should know what they are buying, and so understanding the risks is important and a frequently discussed theme on my site.

By the way, your statement regarding the previous AF contracts is also false. The current contract just announced last week is indeed subject to annual cancellation, but the previous contracts were for 4 years, 3 years and 3 years, so that situation has become more risky.

Jul 23 02:41 AM

[hokieincane...:]

Hi Saj,

You claim that most of my points "were not relevant to the article. The airticle is about AIRT's revenue risks." I contend that all of my points dealt directly with "revenue risks," which you claim was the major thrust of your piece.

First, the Air Force has exercised each of its available options over the prior ten years. You are correct that the ten year period was covered by a four year contract and two three year options at the Air Force's sole option and not two five year contracts as I had stated, so; your comment is not relevant to my point!! The AF exercised each of its options--this was my point. These contracts with AIRT are "requirements type" contracts that don't specify any minimum level of orders; the AF is not obligated to place any orders whatsoever, but they have done business with AIRT for ten years now, exercising or extending each of its opportunities to do business with AIRT and have recently (four days before your piece was published) awarded a new contract.

My second point dealt with "revenue risk" on the FedEx contract. As I stated, FedEx has done business under this contract containing a "30 day cancellation clause" since 1980--nearly 30 years. Enough said.

My third point dealt with "revenue risk" regarding reported backlog levels, which you found a way to distort and mislead the reader in your piece by comparing March 31, 2009 vs. 2008 without analyzing the different timing of AF orders in the two years.

My fourth point dealt with "revenue risk" in the new Global Aviation Services (GAS) division. You attempted to mislead the reader by neglecting to tell how this operation was started and how it has grown profitably over the less-than-two years of its history. I believe that DAL will likely award additional work to GAS at some of its stations, to take advantage of the lower costs that the former NWA part of DAL is now enjoying. DAL needs to find many ways to reduce its costs.

Saj, deal with it!!

Jul 24 10:56 AM

[Saj Karsan:]

Hi Hokie,

Sorry for the late reply.

While you are right that AIRT has thrived in the past despite having these risks, this does not mean the risks do not exist going forward.

As an example, consider Escalade, which recently had a 30-year relationship with Sears cut short all of a sudden. Article here: www.barelkarsan.com/20...

Jul 29 04:21 PM

[TKB:]

Hi Saj,

Would your opinion of AIRT change if the company created another line by acquiring a company specializing in developing airport security devices?

TKB

Aug 06 06:40 PM