- Atlas Air is one of the most undervalued companies in America based on 2020 cash generation.
- E-commerce shipping is bottlenecked for capacity, and Atlas is a leading outsource supplier in the airfreight industry.
- Technical trading momentum indicators are flashing a "buckle-up" signal for the potential of another sharp price advance.
Believe it or not, on the current quote of $60, $13.64 in earnings per share and $28.26 in free cash flow was generated by Atlas Air Worldwide (NASDAQ:AAWW) during 2020! And, the continuing explosion in the online retail world of COVID-19 could help support a second year of stellar returns during 2021. The largest U.S. logistics and rapid package moving companies of Amazon (AMZN), FedEx (FDX), and United Parcel Service (UPS) are still struggling to keep up with the e-commerce surge in box volumes. [Amazon owns a minority stake in Atlas through warrants.] The ISM manufacturing survey out today is full of worries and complaints about the supply chain, both on the receiving of inventory and parts, plus the delivery of finished goods to customers.
The latest excuse for super-high rates of e-commerce shipments to U.S. consumers has appeared with hundreds of billions of dollars in new Treasury stimulus money delivered to U.S. taxpayers in March-April. The impulse buys of millions of items online the last couple of weeks may further strain the global transportation network. Last year's Christmas delivery season was the most difficult in history to match online orders with trucks and planes, sorting warehouses and employees. As the economy fully reopens in 2021, overloaded logistics may remain a problem all year.
Atlas Air has benefited perhaps more than any other company in the transportation industry from the 2020-21 pandemic economy. Its focus on the air flight movement of packages quickly, as a top outsourcing organization and contract servicer (subcontractor) for companies like Amazon, has given the enterprise tremendous pricing power. The company had invested heavily in airplanes and distribution infrastructure for years, before slashing 2020 capital expenditures as a precaution from all the unknowns of future pandemic swings in government mandated lockdowns and consumer/business spending. The end result of sky-high pricing and reduced cash expenses has been huge profits and free cash flow.
The question is how long can this uber-bullish setup remain? Wall Street has already been discounting the end of the pandemic economy for six months now, as the Atlas stock price peaked near $70 in October. However, what if a complete recovery from COVID back to a 2019-like backdrop does not play out? What if the online buy and ship to home trend is a newfound freedom and convenience, consumers will maintain as a permanent change in their lives? If this is the case, Atlas could have a bright future indeed past 2020.
Image Source: Company Website
A Top Air Freight and Logistics Choice
Atlas owns the world's biggest fleet of 747 freighters, as well as a range of other Boeing 747, 777, 767 and 737 aircraft for domestic and international cargo, plus passenger operations. The company provides everything from flight crews and maintenance only options to the full-service movement of packages and people. The markets served include express and e-commerce delivery providers, airlines, freight forwarders, charter customers, general shippers and the U.S. military. The largest and newest Boeing aircraft owned by Atlas allow for high operating cost efficiency, including superior fuel savings, with long range and load capacity.
Its operations were a strong margin and return affair before the coronavirus pandemic, reaching new heights in late 2020. Below are charts vs. other companies in the airfreight shipping industry. Gross and operating margins are best-in-class for the sector over the past five years, compared to peers and competitors FedEx, UPS, Air Transport Services (ATSG), Hub Group (HUBG), Forward Air (FWRD), Echo Global Logistics (ECHO) and Best Inc. (BEST).
Cash flow as a percentage of revenues is nearly industry leading, while the cash flow to debt multiple highlights relatively normal financial leverage vs. the industry over the past 6-12 months.
The single reason to get excited about Atlas is its incredibly cheap valuation on cash earnings and cash flow generation. Today, the company has retained an abnormally high level of cash coming in the door, as it prepares options for deploying it to the benefit of shareholders. At the end of December, Atlas held $845 million in cash which is $500 million more than its 5-year average. Comparing year-end numbers, Atlas owned $30 per share in cash (against the present $60 quote) in late 2020 vs. only $4 per share in December 2019.
Below are charts measured against the peer group of reported earnings and free cash flow as a function of price. No other major airfreight corporation comes close to the Atlas valuation on operating cash returns in 2020. If the company experiences business demand approximating last year's level, the Atlas valuation story is completely mispriced in early April.
But that's not all of the undervaluation story. On trailing price to operating earnings, sales, cash flow and tangible book value, the company is a bargain vs. its former self the last five years. Below you can review how the stock price move from $15-$20 last March has been fully justified by the growth in business results. Underlying operating trends have been immensely positive.
Then, if you think through a strong 2021 period, potentially far better than Wall Street is now projecting, the Atlas stock quote at $60 today could still be a giveaway asset play for smart long-term investors. Below is the current Wall Street analyst consensus EPS forecast for Atlas the next several years. I am thinking this is a conservative estimate.
Technical Momentum Building
Below is a 2-year chart of daily price and volume trading activity. After six months of consolidation, and a successful retest of the 200-day moving average, Atlas could be coiled for another burst higher into the summertime.
I have also drawn on the above chart several momentum indicators I track closely. The Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume creations have decent trending patterns over the last year. Of particular note, my computer-sorting system is highlighting a very strong concerted rise in all three of the indicators over the past four weeks. The July-August period of strong price advance was the last instance all were moving up "together." Essentially, we can identify heavy accumulation since late February on both low and high volume up days, with decent gains made inside the typical trading session into the closing print.
I am not alone in my enthusiasm for Atlas Air. Explained by John Vincent's excellent review of the Greenlight Capital Q4 statement of positions, famed investor David Einhorn held Atlas as a top pick several months ago. The company epitomizes the old adage, "Being in the right place at the right time!" Airfreight traffic continues to run at record levels into April, and Atlas shareholders are reaping the rewards.
Seeking Alpha's Quant Ranking system scores Atlas as a Top 25% selection today, while my Victory Formation system (more weighted toward technical momentum factors) lists it as a Top 5% choice.
What are the downside risks? The main worries I have revolve around an unexpected macroeconomic issue like a new recession in consumer spending or a stock market crash that takes all equities down. While both appear to be outlier events to contemplate, the U.S. equity market's record overvaluation on GDP output or company sales and book values is the most concerning. After the early 2021 retail investor euphoria fades, in time we will absolutely have another 20% or greater bear market this year or next. Bull markets are followed by bear swings. That's how Wall Street works.
The other important economic variable to ponder is how will consumers react to the end of coronavirus spread and death. Will they shun the ease of online retail to rush back to stores? Will they shop physical locations at the same rates as before COVID-19, or will they keep spending through e-commerce sites as the new normal? If the answer is the latter (and I think it will be), Atlas airplanes and cargo/shipping services will have entered a new era of prosperity. In that case, a share price of $100 or greater could be coming by the end of 2022.
I own Atlas Air Worldwide shares in my portfolio and may purchase more on any weakness in April. I am effectively buying tangible assets, experiencing high demand currently, at a price below their net acquisition cost (net hard asset book value of $79 per share). Where else can I find a stock trading at 5x trailing earnings, with a strong projected future? Not many exist today, after a record 100% increase in the U.S. equity market from the lows of last March.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Analyst’s Disclosure: I am/we are long AAWW. 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.
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