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Saj Karsan, Barel Karsan (300 clicks)
Long only, deep value, value, contrarian
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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

Source: No Room for Error at Air T