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Erickson Air-Crane (EAC) is a leading supplier of aviation services to a range of customers on six continents. They manufacture and operate the S-64 Aircrane, a heavy-lift helicopter used in various lift and load operations. For more background, check out their site here.

EAC has a market capitalization of around $184M. Despite its relatively unknown status, there have been two recent articles on Seeking Alpha, taking both sides of the coin regarding Erickson's future.

Richard Pearson's article presents the short case - basically saying that Erickson's recent acquisition of Evergreen Helicopter [EHI] was an insider deal that was set up by ZM Fund to save itself from some losses on debt it held in EHI's parent.

Super-trades presented a point-by-point rebuttal in his article shortly thereafter.

In my opinion, the matter boils down to one key question: Was/is Evergreen Helicopter actually in distress?

Evergreen Helicopter

The rebuttal provided by super-trades addresses the question of whether or not Evergreen Helicopter was the entity in distress, or if was a profitable company being held down by the parent.

In the EX-99.1 Filing found here, you can see the independent auditor's report regarding Evergreen Helicopter. On page F-2, there is a paragraph titled "Emphasis of Matter Regarding Going Concern".

. . . the Company is in default on its debt, has negative working capital, and in addition, is a guarantor of certain of its Parent's and a Stockholder Affiliate's debt that is also in default at December 31, 2012. The default on the Company's and its Parent's debt and the resulting liquidity concerns raises substantial doubt about the Company's ability to continue as a going concern.

Note that 'the Company' specifically refers to Evergreen Helicopter - not the parent.

Later, on page F-8 of the same filing, there is more detail provided regarding the specifics. EHI has negative working capital of over $14M, and is in default on its mortgage and other loans totally over $11M (as of 12/31/12). However, it must also be noted that over the course of 2012, EHI transferred over $56M to its parent company, presumably to help the parent meet liquidity demands.

Evergreen Helicopter, as well as its parent, seem to be in distress. However, it is entirely possible that the whole reason EHI was in default on its loans was due to forced payments to the parent company. EHI did post net income of over $17M in 2012, given that it is now free from the parent, Evergreen could very well improve its position substantially.

What This Means for Erickson Air-Crane

If the Evergreen acquisition was indeed a bad deal, significant stress could be put upon Erickson. In EX-99.2 found here, on page 32, the combined pro forma balance sheet show that it will sport a debt to equity ratio of over 350%. There is no doubt that the acquisition adds significant debt. Whether or not Erickson can handle it remains to be seen.

The other acquisition Erickson has pending is of Air Amazonia, a small company operating in Brazil. I believe this is an overlooked potential gem. Erickson should be closing the deal shortly for roughly $75M.

In 2012, Air Amazonia had estimated stand-alone revenues of $52M and EBITDA of over $15M. Because it operates in Brazil, a barrier to foreign competition is built in, as the government caps the amount of time that foreign pilots and crew can operate in the country. Additionally, the deal includes 3 years of guaranteed revenue of $45M per year (found on page 2 of the EX-99.2 referenced above). This utilizes only half their fleet. If Erickson can find opportunities to deploy some of the remaining aircraft, there is potential for growth over the next several years.

If Erickson is able to handle the new debt burden and integrates the new businesses as well as they hope, there is no doubt potential for serious price appreciation in the stock. In the most recent conference call, management states that full year 2013 guidance is believed to be between $108-$116M.

To be conservative, I'll use EBITDA of $85M.

A EV/EBITDA multiple of 7 results in EV of $595M. A multiple of 9 yields $765M. Subtracting out the roughly $420M of interest bearing debt and adding back the $47M in cash (found in combined pro-forma EX-99.2 above) results in a range of $222M to $392M. Divided by 14M shares outstanding (assumes 4M of convertible preferred in Evergreen acquisition are exercised) gives us a per share range of $16-28.

Even using a valuation that I believe to be conservative, at bottom the price is just marginally below current levels. If management guidance proves correct and a reasonable multiple is applied, shares could easily reach $40.

It comes down to whether or not you believe Erickson has the ability to successfully integrate Evergreen and not be overwhelmed by debt. I have trouble convincing myself to go long yet, as I believe there is a large risk involved. I recommend waiting for the next few quarterly reports if a position has not already been initiated. If the numbers look good, there could still be plenty of room to run.

*Financial data and reports accessed via Fidelity.com

Disclaimer: The research and opinions provided in the article are my own. I am not a registered advisor. You should conduct your own due diligence before investing.

Source: Erickson Air-Crane: Big Risk, Big Reward