My portfolio has a lot of technology and stocks that have performed well. As some of these stocks get near their all time highs again, I've been cutting down my exposure to some of them because some of them had grown to a large % of my portfolio (a good problem to have). As a result, I've built up some cash and have been looking for cheaper names of beaten down companies outside of technology. One name I came across was Atlas Air, ticker symbol: AAWW.
*Not a financial advisor nor is this intended to be an investment recommendation. Just my two cents about a company I found. Everyone should always do their own DD and reach their own conclusions.
Company Profile:
The company operates aircrafts that it leases to a variety of customers. The business is divided up into two main categories:
ACMI - the company leases out planes to customers either for chartering pasengers or shipping goods. The customer is responsible for expenses like fuel, landing, and other risks. AAWW is responsible for providing the plane, crew, maintenance, and insurance.
Charter - this segment provides chartered planes to a variety of customers including sports teams, the US military, freight operators, etc. Here, the customer pays AAWW a fixed fee in order to charter passenger or cargo planes.
2020 Financial Highlights:
-Revenue grew 17% up to $3.2B
-Net Income grew to $360M
-2020 Gross Margin expanded to 34% from 30% in 2019
-Current Assets grew significantly to $1.2B, $845.6M of it in cash
-Net Debt decreased from $2.9B in 4Q 2019 to $2.02B in 4Q 2020, leverage ratio dropped from 4.4 in 2019 to 2.1 in 2020.
-Over $1B in cash from operations in FY 2020
Thesis
The company did not provide guidance for FY 2021, something that doesnt bother me. The pandemic is still pressing and likely will be for most of 2021. I wouldnt put much stock into any 2021 guidance given anyway.
I really like this name because of its insanely low valuation and due to the continued need for freight operators. Shipping has obviously been tough due to the pandemic and shipping via ocean is challenging due to the high cost and delayed timing. There is a massive shortage of shipping containers and many shippers are looking for alternative sources to get goods shipped. I think a company like Atlas Air could benefit from that in 2021. Even as the pandemic starts to dwindle down (hopefully), there will still be a huge need for shipping and logistics. sure, people will go out and travel, eat in person, etc... but they will still order online and goods will be in high demand.
The valuation of the company is insanely low right now. But how can a stock go from $23 to $61 in a year and still be highly undervalued? Right now, the company is trading at a Price/Book of .78 and a price/cash flow of 1.83. Notmany high quality names are going to give you those valuations.
One other thing I like about this name is their cash build up and deleveraging. This company only had about $100M cash on hand as of 12/31/2020 and like most companies, it cut expenses and capex when the pandemic struck due to the desire to keep cash. Well now they are in a great position to use that excess cash to create value for their shareholders. Management did not make any predications about large stock buybacks, dividends, or acquisitions. I think stock buybacks, something I usually oppose, is the right answer here. The stock is trading under book value and it would make sense to buyback stock here. I dont know the industry well enough to know what names could serve as a strategic acquisition for them.
Ownership
One other interesting note is that Amazon is a shareholder, owning less than 5% of the company. Amazon has warrants that it has excercised in the past. Based on what I can see, Amazon could own more than 10% of the company and appoint a Board member, but it has kept its ownership stake under 5%. As of 12/31/2020, AAWW has 27 airplanes leased to Amazon.
Of the top 5 institutional holdings, 4 have increased their stakes in AAWW (BlackRock, Vanguard, Greenlight Capital, and Donald Smith & Company.)
Risks
-While I think the Amazon deal is a net positive, there is a risk that Amazon could terminate the agreement. Amazon has the right to terminate the agremeent with or without cause with a 180 day notice. Additionally, if Amazon continues to acquire shares through their warrants, it would dilute existing shareholders.
-Air Atlas also does a lot of business with the Department of Defense, Air Mobility Command (AMC). Revenue from AMC represented 24% of total revenue in 2019 and 16% in 2020. While the lowering reliance on them is good, 16% is still a large number. Air Atlas and AMC operate in 2 year contracts and requires strong operational performance from AAWW. Changes to their relationship with AMC could harm the company.
-Climate change - if steps are taken to curb carbon footprints through additional regulations or taxes, that would be a net negative for AAWW
-Decrease in air freight. I noted this one earlier, but the risk that air transportation demand decreases is a realistic risk. I dont agree with that and think the problems with shipping via oceans could lead to more business for air freight companies.
Final Thoughts:
This is my first DD post on this form, so I'd be interested to hear people's thoughts (good and bad).
I like this company and continue to read about it. It is cheap and there are certainly reasons for that, but I think the stock is still undervalued. The main premise of this position is: "Do you trust management to allocate capital correctly here given their large cash balance." For me, the answer is yes, but I am mindful of existing relationships that company has with the DoD and Amazon. I have seen plenty of smaller companies get crushed due to existing agreements with larger companies.
Right now, I own a LEAP call option. The Jan 2022 call option with a strike price of 50. I will be holding for the months to come.
Submitted April 07, 2021 at 11:20PM by Pittsburgher23 https://ift.tt/3wzRo7L
