Erickson Air-Crane: Acquisitions Will Reward Patient Shareholders

Jul.23.13 | About: Erickson Air-Crane (EAC)

In 2013, shares of Erickson Air-Crane (NASDAQ:EAC) are up 130%. This is due to several new acquisitions the company has made to diversify itself. The other reason for the rise in shares is likely due to an IPO pricing miss. Shares appear poised for another breakout, with low price to earnings valuation, and should be trading higher.

Shares of Erickson Air-Crane priced at $8 during their IPO. This came after initial given range of $13 to $15. At the time of the IPO, the company was marketed as a helicopter company focusing on government contracts for firefighting. Since the IPO, the company has reported great earnings and diversified itself into new markets via acquisitions.

Erickson Air-Crane acquired Air Amazonia, a helicopter unit focused on oil and gas exploration. The acquisition calls for six aircraft and ground facilities. Erickson Air-Crane paid $23 million upfront for the company, with the possibility for additional payments. The company had this to say of the South American acquisition, "This is a significant step in our strategy of continuing our expansion into the South American oil and gas market." Erickson was also given right of first refusal to purchase the remaining 8 helicopters in Brazil being used by Air Amazonia's parent. Along with the acquisition, Erickson entered into a five-year aerial service contract with Air Amazonia's previous parent company. The agreement will bring in $29 million a year in revenue for Erickson.

Earlier in the year, Erickson acquired Evergreen helicopters. The acquisition price was $250 million, paid for with cash and preferred stock issued. In 2012, Evergreen posted revenue of $196 million, equal to a greater number than Erickson put up on its own ($180.8 million).

The two acquisitions have diversified Erickson Air-Crane's revenue mix by geographic region and business segment. This is extremely important for a small cap company that is new to the market. With the two acquisitions, Erickson will have over 100 aircraft and operate in North America, South America, Middle East, Africa, and Asia Pacific regions. Together, the three combined companies would have had 2012 revenue of $430 million. This is more than double the number ($180.8 million) Erickson put up on its own.

In 2012, Erickson received 45% of its revenue from the firefighting division and 8% from its newer oil and gas division. With acquisitions, the new base will shift to a stronger department of defense segment (43%) and oil and gas (15%), while firefighting will make up only 19%.

In 2012, North America represented 60% of revenue, leaving heavy reliance on one market. The combined companies represent the following geographic diversification:

· 33% North America

· 30% Middle East

· 15% South America

· 11% Australia

· 10% Europe

· 1% Africa

Both acquisitions will bring diversification, higher margins, and a new customer base that should highlight additional contracts. Company chief executive officer Udo Rieder had this to say, "This was a strong start to 2013. Performance by our Aircrane operations and our completion of the EHI transaction position us to quickly transform is enabling us to emerge as a highly diversified, global company with a wide array of opportunities to generate high-margin growth. We expect to demonstrate our ability to drive value to the full range of our constituents, including customers, partners, and shareholders."

In the most recent first quarter, Erickson reported strong growth that sent shares higher. First quarter revenue was a company record of $36.9 million. This was an increase of 33.8% and is significant since the first quarter has traditionally been a slower one for Erickson. Total flight hours increased 38% to 2160, as Erickson continues to utilize its aircraft better during normal off-season quarters. Adjusted EBITDA was $7.0 million and adjusted operating income was $1.9 million.

Analysts on Yahoo Finance show Erickson earning $2.23 in earnings per share for fiscal 2013. Revenue is expected to increase 82% to $330.4 million. In fiscal 2014, analysts see earnings per share hitting $2.40. Revenue is expected to increase 23% to $407.2 million. Erickson updated its own guidance during its first quarter call. The company sees fiscal 2013 revenue hitting a range of $325 to $335 million. If both acquisitions were closed, revenue would come in closer to $385 million. As for 2014 numbers, I think upgrades will be coming. In 2012, the three companies put up revenue of $430, which is significantly higher than previous estimates of $407.2 million.

There are several risk factors to investing in Erickson. The company used a portion of preferred stock to fund the acquisition of Evergreen, which could dilute shares going forward. The company also increased its long-term debt in the first quarter to over $100 million. Previous owner ZM Funds, a private equity investor, is also working on offloading its stake. However, I think in the long-term range, the rewards will outweigh these two risks.

Shares of Erickson Air-Crane are up significantly on the calendar year. However, I believe investors are underestimating the acquisitions and future earnings. Shares should be trading at closer to 10 times earnings, implying price targets of $22.30 and $24.00 going forward. Second quarter earnings will be presented on July 29th, possibly sending shares to new highs, or providing investors a pullback to buy shares.

*Information in this article came from several investor presentations found here.*

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EAC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.