* All data are as of the close of Monday, December 29, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
There is more to the airline industry than just planes, and for investors there are more companies to invest in than just the airlines.
This is where the Air Services industry comes in. It may be flying under the radar by most investors' perception. But it does hold some very high flying stocks that have actually been flying way above the radar and should be seriously tracked.
Just what does the industry offer? In the simplest of definitions:
"Companies in the Air Services category provide management and other airport operation services to airports throughout the world. These companies work to maintain and operate airports and offer several other related services."
The three largest U.S.-based companies in the space offer the following:
• Macquarie Infrastructure Company LLC (NYSE: MIC), headquartered in New York, New York, owns, operates, and invests in infrastructure businesses that offer bulk liquid storage and handling services for petroleum products, various chemicals, renewable fuels, and vegetable and animal oils at 10 marine terminals in the United States and 2 in Canada, in addition to providing environmental emergency responses, industrial services, and waste transportation and disposal services. It also processes and distributes synthetic natural gas, liquefied petroleum gas, fueling and fuel-related services, aircraft parking, and hangar services for jet aircraft primarily in the general aviation, commercial, military, freight, and government aviation sectors at 63 airports in the United States. Additionally, the company has interests in five contracted solar photovoltaic power generation facilities located in the southwest United States, and produces and distributes chilled water through a closed loop of underground piping for use in the air conditioning systems of large commercial, retail, and residential buildings.
• Air Methods Corp. (NASDAQ: AIRM), headquartered in Englewood, Colorado, using a fleet of 264 company-owned aircraft and 136 leased aircraft, provides air medical emergency transport services and systems, which include air medical transportation services to the general population, hospitals and other institutions, medical aircraft operation and maintenance, 24-hour communications and dispatch, and medical billing and collections. It also provides aerial tours and charter flights, primarily over the Grand Canyon and Hawaiian Islands. Additionally, the company operates various online booking websites for hotels, resorts, and cruise ship operators. It also designs, manufactures, installs, and certifies modular medical interiors, multi-mission interiors, and other aerospace and medical transport products for domestic and international customers.
• Atlas Air Worldwide Holdings, Inc. (NASDAQ: AAWW), headquartered in Purchase, New York, provides outsourced aircraft and aviation operating services, offering outsourced cargo and passenger aircraft operating solutions under contractual service arrangements, which include providing aircraft, as well as value-added services such as crew, maintenance, and insurance. It also provides military charter services to the U.S. Military Air Mobility Command, seasonal, commercial, and ad hoc charter services, and aircraft and engine leasing solutions for regional airlines, express delivery providers, freight forwarders, the U.S. military, and charter companies.
But don't let the rather mundane activities of this little sideshow fly past you. These companies' stocks have put on quite the acrobatic air show. Since the economic recovery began in early March of 2009, all three of our top U.S. Air Services companies have soared well above the S&P 500 index as graphed below.
Where the broader market S&P 500 [black] has gained 210%, Atlas [purple] has ascended 390%, Air Methods [blue] has climbed 850%, and Macquarie [beige] has soared 5,250%.
On an annualized basis, where the S&P has averaged 36.52%, Atlas has averaged 67.83%, Air Methods has averaged 147.83%, and Macquarie has averaged 913.04% per year! A $1,000 investment in Macquarie in March of 2009 would today be worth $53,269.23!
Looking at future earnings growth, the Air Services industry as a whole is expected to out maneuver the broader market as tabled below, where green indicates outperformance while yellow denotes underperformance.
Over the next two quarters, the industry is seen outgrowing the market's earnings at some 3.02 to 6.20 times its rate, before settling to a more sustainable but still robust 3.34 times in 2015 and 1.85 times annually over the next five years.
Zooming-in a little closer, the three top U.S. companies in the space look poised to continue their split performance reminiscent of their stocks, as tabled below.
After flying through a bad air pocket in the current quarter, Macquarie is expected to outgrow its competitors and the broader market from next quarter onward as far as the eye can see, reaching growth rates of some 43.43 times the S&P's average at its height in 2015.
Air Methods, for its part, is expected to fly a steady but slightly descending course of earnings growth from 4.11 times this quarter to 1.99 times over the next five years.
Meanwhile, Atlas is expected to lose altitude considerably through earnings shrinkage, with the exception of positive growth in 2015 which still underperforms the broader market.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Macquarie delivered the greatest revenue and earnings growth year-over-year at an exceptional degree, while Air Methods delivered the least, even shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Macquarie operated with the widest profit margin while Air Methods enjoyed the widest operating margins. At the narrow end of the scale, Atlas and Macquarie split the narrowest margins between them.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Air Methods' management team delivered the greatest returns on assets where Macquarie's team delivered the greatest returns on equity. At the low end of the spectrum, Macquarie's and Atlas' teams split the worst returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Macquarie provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Air Methods' DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Atlas' stock is cheapest relative to forward earnings, company book value and 5-year PEG. At the overpriced end of the scale, Macquarie is the most overvalued relative to earnings and PEG, where Air Methods is the most overpriced relative to company book.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Atlas offers the highest percentage of earnings over current stock price for the current quarter and 2015, where Macquarie offers it for next quarter. At the low end of the scale, Macquarie offers the lowest percentages for this quarter and 2015, while Air Methods offers it for next quarter.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Air Methods offers the greatest growth in the current quarter, while Macquarie offers it next quarter and beyond. At the low end of the spectrum, Atlas offers the slowest growth prospects for all future periods, mostly in shrinkage.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Atlas' stock offers the greatest upside potential and greatest downside risk, while Macquarie's stock offers the least upside and Air Methods' offers the least downside.
It must be noted, however, that Macquarie's and Air Methods' stocks are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Air Methods is best recommended with 4 strong buys and 3 buys representing a combined 100% of its 7 analysts, followed by Macquarie with 2 strong buy and 3 buy ratings representing 71.43% of its 7 analysts, and lastly by Atlas with 4 strong buy and 1 buy recommendations representing 45.45% of its 11 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Air Methods by an impressive height, outperforming in 11 metrics and underperforming in 6 for a net score of +5, followed well below by Atlas, outperforming in 10 metrics and underperforming in 11 for a net score of -1, with Macquarie encountering some air turbulence way in the distance, outperforming in 11 metrics and underperforming in 15 for a net score of -4.
Where the Air Services industry is expected to outperform the S&P broader market substantially this and next quarters, significantly in 2015, and meaningfully beyond, the largest three U.S. companies in the space are seen split performing with various altitudes of earnings growth, with Macquarie's earnings in ascent, Atlas' earnings in descent, and Air Methods' earnings cruising on auto pilot with steady growth somewhere in between.
Yet after taking all company fundamentals into account, Air Methods Corp navigates with the soundest financial readings, given its lowest stock price ratios, highest cash, revenue and EBITDA over market cap, highest future earnings over current stock price overall, and best high price target - smoothly winning the Air Services industry competition.