It's not always fun watching sausage get made, but the end result can be appetizing enough. That's our takeaway after reviewing fresh quarterly results for aircraft leasing and logistical services firm, Air Transport Services (ATSG).
The company's Q1 results included a wide range of streamlining efforts that should enhance margins in the quarters to come. Financial results appear solid enough right now, and should look even better down the road-all of which keeps ATSG a Buy on the Recommended List of our InsiderInsights Newsletter amongst 33 other long positions.
Air Transport leases planes and crews to firms that need to transport goods. Global delivery firm DHL is Air Transport's largest customer, generating just over a third of revenues for ATSG. The U.S. military generates roughly another 15% of sales. Besides North America and Europe, Air Transport's planes service higher-growth markets, such as internal transport within Brazil, India and China. The company's regional aircraft fleet isn't deployed in the more cutthroat long-haul segment of air transport, and Air Transport has many of its assets under long-term leases.
Results continue the affected by the loss of a key contract in 2011 with logistics firm D.B. Schenker. So ATSG's results appear to have fallen from a year ago in the first quarter, but were actually slightly firmer on an organic basis. Results are surely being impacted by Air Transport's efforts to restructure its business, however, so it can provide its own logistics services. So margins are a bit depressed right now. Results in the June quarter should be similarly impacted.
Also of concern is the small note of caution from management during its last conference call, not only in the timing of new planes entering the fleet, but when and at what rates those planes are contracted for. So while ATSG still appears on track for almost $200 million in EBITDA this year, we wouldn't be surprised if that figure comes in closer to $175 million.
Importantly, even with that potential disappointment later this year, ATSG remains a fairly cheap stock. The company has a market value of $360 million and an enterprise value (EV) of around $675 million, implying an EBITDA multiple below four times EV even if 2012 EBITDA is just $175 million. That's half the valuation of competitor Atlas Air Worldwide (AAWW). ATSG is half as dear on a price/sales basis as well compared to Atlas.
Granted, Air Transport is being understandably penalized for some sloppy execution in 2011 and exposure to potentially shrinking demand form the U.S. military, but the main concern for ATSG is arguably the same as for AAWW: a slowing global economy. So the extent of ATSG's discount to AAWW doesn't seem correct.
And what if economic Armageddon is avoided? If and when the global economy firms, lease pricing for planes is likely to materially strengthen, and Air Transport's EBITDA would spike past the $250 million mark. The full bullish scenario would be for ATSG's EBITDA to hit $250 million by 2014, spurred on by economic firmness. Such an environment should also allow investors to reward the stock with a higher EBITDA multiple closer to five. That would result in a target enterprise value of around $1.25 billion, implying a market value roughly 2.5 times higher than current levels.
Granted, the above contains many non-catastrophic assumptions, and thinking at all optimistically is tough to do in the present market environment. Heck, ATSG is off 25% from the highs it hit just last February due to the continuing macroeconomic pall hanging over financial markets. We fortunately bought ATSG well after investigating its prospects in the wake of a large cluster of buying by insiders late last summer. So we're still sitting on a 27% gain, and would have no problems taking our remaining profits now if we thought this stock couldn't fly again.
But we do, and note that ATSG's recent price weakness has the look of merely consolidating this stock's gains at logical technical supports. While ATSG's chart will no-doubt turn ugly in a hurry if Europe's debt problems turn contagious, so will those of most every stock. If that's you're major concern, you probably aren't and shouldn't be looking for any new long ideas.
Until Euro-geddon strikes, Air Transport's low valuation and sustainable looking fundamental growth appear confirmed by ATSG's still bullish-leaning insider profile. For investors willing to commit funds during this tense macroeconomic period for equities, ATSG remains a Buy.
Disclosure: I am long ATSG. Clients of Insider Asset Management llc are also Long ATSG.