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The story on Air T (NASDAQ:AIRT) is pretty simple. The company operates in three segments. The first provides overnight small package delivery services to FedEx (NYSE:FDX). This accounts for approximately 48% of the company's total revenue (all from FedEx). The second manufactures deicing and other types of aircraft ground service equipment. This segment accounts for 41% of the company's total revenue, of which half is attributable to a contract with the US Air Force. Finally, the company operates a fast-growing segment providing ground support services to airlines. This segment grew by 19% in the past year and accounts for 11% of the company's revenues. A contract with Delta/Northwest (NYSE:DAL) accounts for two-thirds of this revenue.

By any classic measure, this stock looks very cheap:
P/E: 7.2
P/B: 1.1
P/S: 0.3(!)
P/FCF: 4.9

A few other interesting stats:
Mkt Cap: 26.74M
Div Yield: 3%
CROIC (10yr avg, TTM): 18%, 31%

The company has strong and growing cash flows; FCF has exceeded earnings the last two years. The balance sheet is sterling. AIRT has over $20 million in unweighted NCAV, including approximately $7 million in net cash/short term investments. Perhaps best of all (especially for an airline company) AIRT has, for all intents and purposes, zero long term debt. Unlike other airlines, AIRT's subsidiaries MAC and CSA lease all of their planes from FedEx, which keeps debt from growing. Revenues (which I don't spend too much time with due to the fact that they are easily manipulated) have grown from $67.3M in 2007 to $81.1M in 2010 (they were $90.7M in 2009).

One other good point: the CEO owns about 7% of the company, always a good sign.

So revenues have suffered a little bit, especially in the last year, but otherwise AIRT looks very good financially. But let's dig a little deeper.

I think at this point it is safe to say that 2009 was an aberration. The company practically admits this. Sales of deicers to the Air Force were at an all time high in 2009 and have since taken a huge hit. Sales fell by almost 20% in this segment from 2009 to 2010. In 2009, the company's contract with the Air Force expired and was renewed but AIRT cautions that due to the competitive bidding process, margins are likely to be squeezed in this segment going forward. Orders have also been lower under this contract. AIRT also sells equipment to other customers, but USAF is by far the biggest.

About 75 percent of the company's revenues come from three customers, FedEx, the USAF, and Delta/Northwest. FedEx can cancel its contract with AIRT at any time with 30 days notice. The Air Force has 4 one-year options to renew its contract. The contract with Delta/Northwest expires in December 2010. I have no basis for assessing the likelihood that any of these contracts will not continue, but there is obviously a risk here. It is worth pointing out that other than the package delivery service (it has worked with FedEx since 1980), AIRT has been actively diversifying its business.

This company pays out about 15% of FCF in the form of dividends. Why a company this small with so much obvious growth potential even pays a dividend, I cannot possibly figure out.

But all of this is fairly obvious from a brief glance at the financials. I promised you I was going to dig deeper.

For starters, despite looking cheap by numerous measures, it should be noted that these ratios are relatively normal for AIRT. For instance, other than 2004-2006, AIRT's P/E has been right around 7, or even lower. This doesn't mean that the stock is not cheap, but it is a cause for concern.

In the short term, the deicing business is in all kinds of trouble. Note 3 to the 10-K breaks out the classes of inventory that the company has on hand. In the ground equipment manufacturing segment, the figures are really ugly. Despite sales falling, the finished goods in inventory more than doubled! Raw materials fell by about a third and the company has 17% of the WIP that it had last year. This tells a story. The story it's telling is that there are no orders coming in for this equipment. Not only has the company stored up huge reserves of deicing equipment, it hasn't been starting work on new equipment. This leads me to believe that next quarter's sales are going to be bad, and potentially very bad.

Patience is a key part of value investing and being able to say "no" is another. Despite what I view as a compelling valuation for AIRT, I am very worried about the deicing business, and I am going to have to pass on this company... for now.

Disclosure: No positions.

Source: Why I'm Not Buying Air T (Right Now)