The Bottom Fishing Club: Atlas Air Worldwide

Summary

• 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.

Photo by guvendemir/E+ via Getty Images

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.

Ultra-Low Valuation

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.

Final Thoughts

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.

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.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

Comments

[aries1973]

Good job on this one. I bought AAWW after reading your article and then doing some research. They have great earnings and I'm up a lot for such a short period of time. Appreciate your guidance!

[Paul Franke]

@aries1973 Glad to help.

[NYCASH]

Great article. I am long AAWW and I am looking forward to additional gains as you outlined in your article. My thought process was equal to yours with the continuing gains in e-commerce along with the reopening post pandemic.

[AAJetMan]

Thank you Paul! I rarely buy non dividend-paying stocks in my recently-retired life but find $AAWW too compelling! Appreciate your insight and analysis.

[Software Phil]

Interesting insights on Amazon & AAWW - see www.fool.com/...

[Os1988]

Hi Paul,

Thanks for the article. any thoughts on the insider sales over the last six month of ~ 14 Million.

[Nathan5]

Paul,
For another unbelievable Price/FCF stock- have a look at NXST.

[Paul Franke]

@Nathan5 NXST = Considerable leverage against intangible assets, -$6 billion (-$150 per share) in hard asset book value, about 10-12 years of trailing annual cash flow to pay off all long-term liabilities.

Atlas has net assets worth more than current stock price in a fire sale. About 8 years of cash flow (trailing 2020 rate) to pay off all liabilities.

[Nathan5]

@Paul Franke As you point out, Atlas is a play on lockdown behavior continuing going forward; NXST with it's add revenue, is a play on the economy opening up. They have delevered over a full turn since the Tribune aquisiton a year and a half ago, and are currently at 3.6x. They are increasing divi by about 25%/year with a payout ratio of something like 18%; buying back shares; buying smaller companies to increase their digital offerings. Current Price/ FCF is below 5x.

[Eenbock]

Very informative. I'm buying, have always done well with your opinions. Why don't you have a newsletter?

[PreCambrian]

Your reasons for not buying AAWW fit the market in general. I wonder however about the tangible asset valuation since the planes may be carried on the books at a higher cost than one could buy planes for now with the glut. An interesting stock pick and perhaps I will put in a limit order at $58.

[Paul Franke]

@PreCambrian I do think many passenger jets will be purchased on the cheap and converted to freight movers to meet demand this year.

[shota_showtime]

I have read an article from November 2020 about Atlas Air refusing to repay 460M emergency coronavirus aid. Is there still a risk that they have to repay this money? Is a lot of money when you compare to 360M net income in 2020. Would Atlas Air have had a negative result for 2020 without this aid?

[Paul Franke]

@ericdenblanken I believe this sum was listed as "Other Operating Activities" on the cash flow statement, plus a reduction in "Accounts Payable."

Earnings before "Unusual Items" in 2020 was a record, and 2x the 2019 number (before taxes).

SA has "Normalized EPS" of $8.30, for a P/E closer to 7.5x.

[dumpy1]

Thanks for the nice article. Any idea what a new contract for the pilots might mean for their margins? I believe it is coming soon; not sure how much of an expense pilot pay is for them.

[LeonK2007]

I always enjoy Paul's article though could never understand "the bottom fishing" in their titles. I would if the articles was published in October of 2019 when the stock was $20 before COVID or $30 when it has bottomed out.

[Paul Franke]

@LeonK2007 I blame FED Chairman Powell. It is hard to find any stock that has declined the last six months. If Atlas rises to $90 in December from $60 today, $60 will be considered a bottom.

[Paul Franke]

If I were running Atlas, I would use the extra $500 million in cash to start a 20% stock buyback. If they can purchase shares under the $79 in tangible book value, they can jump hard asset backing, EPS and cash flow per share dramatically by the end of the year.

Then, with another $300-400 million coming in the door during 2021, I would pay off some debt. Better final margins and fewer liabilities on top of a 15-20% bump in per share cash generation should translate into higher/safer Wall Street multiple valuations. A price of $90-100 is possible if the airfreight market remains tight in 12-18 months.

[Alessandro Pasetti]

Shrinking the share count makes sense, but a) they cannot deploy CA/PSPA-related funds to repurchase stock and then b) buybacks/dividends are forebidden until end of Q3, where there remain restrictions on executive compensation until 3/24/2022. Specifically (source: 10-K):

"In connection with agreements entered into with the U.S. Treasury (the “PSP Agreement”), with respect to payroll support funding (the “Payroll Support Program”) available to cargo air carriers under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we are required to comply with the relevant requirements of the CARES Act. These requirements include that funds provided pursuant to the PSP Agreement be used exclusively for the payment of certain employee wages, salaries and benefits of Atlas and Southern Air (the “PSP Recipients”). The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including prohibitions of repurchasing shares in the open market of, or making dividend payments with respect to, our common stock through September 30, 2021, as well as certain limitations on executive compensation until March 24, 2022. Under the PSP Agreement, we must also maintain certain internal controls and records relating to the payroll support funding and we are subject to additional reporting obligations. If we do not comply with the requirements and restrictions within the Payroll Support Program, the U.S. Treasury could require repayment of amounts previously provided to us, among other actions, which could have a material adverse effect on our business, results of operations and financial condition."

Interesting piece, thanks.

[Paul Franke]

@Alessandro Pasetti Thanks for the comment.

[Paul Franke]

@Alessandro Pasetti By the time share buybacks are allowed in October, the price could be north of $80.

[Pacific Orient]

I bought in at 19 and change. I actually think there is considerable down side risk currently as time sensitive ppe related shipments taper off, seaborne traffic has obviously picked up and as international commercial air traffic picks up there will be a surge in belly cargo space, gouging market share.

[Paul Franke]

@Pacific Orient Thanks for the comment.

Yes, the growing number of commercial air flights will help the situation some. However, the shear volume of packages will continue to expand faster, at least into the summer months. Consumers are full of cash and confidence at the moment, stock and real estate wealth readings are at record highs. If airfreight capacity increases 10%, but package volume grows 30%, the shortage of delivery options gets "worse" in coming months.

[lakeman]

How do you explain 20 insider sales transactions and no insider buys over the last five months, with the latest sale on March 29, 2021, and three insider sales in March by the CFO? Agreed, very cheap valuation, but are you missing something here? What will happen to freight rates as the airlines start flying again and carrying cargo in their belly? Has Amazon applied for their air operating certificate? They are building out their ground transport infrastructure and I'm sure would like to do the same in the sky. Could you address these issues. Thank you

[Paul Franke]

@lakeman Amazon should acquire Atlas to build out their airfreight exposure quickly.

Insiders often sell after a 200% price advance over less than a year. Cannot blame them for locking in big gains. They are likely assuming the world will get back to normal and airfreight traffic will do the same this year.

However, my understanding is the airfreight capacity problem has gotten worse over the last month, because package volumes are growing much faster than anyone anticipated 8-10 weeks ago.

[Paul Franke]

@lakeman Yahoo! Finance has a net 60,000 shares purchased by insiders, after you include stock grants the last 6 months.

finance.yahoo.com/...

[killoranf]

@Paul Franke Thanks for the information. I’m most concerned about air freight capacity increasing significantly during the remainder of the year, as the major airlines resume higher levels of passenger service. Any sense for how secure AAWW’s freight contracts are in the face of this aspect of the great re-start?

[JCarl Finance]

$AAWW is incredibly undervalued. I'm glad I saw this when I did even though I didn't buy close to the bottom a year ago. Very comfortable buying at $60 with my price target ranging from $80-$100 for EOY.