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Air T: A Microcap Value Opportunity with Catalyst
Posted by: Frank Voisin (IP Logged)
Date: June 22, 2012 07:58AM
Earlier this week, in discussing customer concentration, I recalled a company I had not looked at in a while, Air T, Inc (AIRT). AIRT is in the air express delivery business, and its largest customer (accounting for approximately 50% of revenues) is Fedex (FDX). In confirming that AIRT still had high customer concentration (a fairly safe bet, considering FDX has comprised half or more of AIRT’s revenues since inception), I noted a recent 8-K filing:
Quote:The reason this caught my attention is that companies tend not to adopt shareholder rights plans (also known as “poison pills“) unless there is an actual threat to the company (really, to management’s cushy compensation packages) of a hostile bidder. It was then that I noticed a flurry of SC-13D filings, which are required filings for investors that acquire more beneficial ownership of more than 5% of any class of publicly traded securities in a public company. Unlike the SC-13G filing, which is filed by passive investors, the 13D requires the investor to state the purpose of the transaction. These filings often provide some warning as to when an activist investor has become involved in the company.
In the case of AIRT, the filings were made by a firm called AO Partners and its affiliates, including Nick Swenson, the general partner of AO Partners. The first filing announced a 6.2% stake. At that point, the purpose of the transaction was “for investment purposes in the ordinary course of business.”
That was in January. In March, another filing updated the ownership level to 8.2%, and announced a new purpose of the investment:
Quote:This is where things tend to get interesting. Asking for a seat on the Board signifies the position is far from passive, and that the investor seeks to unlock value in any of a number of ways (spin-offs, special dividends, etc). Later in March, the firm announced it had increased its ownership to 10.2%. This is when AIRT enacted the poison pill.
AO Partners increased its ownership to 10.8%, and amended its request to include another seat on the board, as detailed in this letter:
Quote:Swenson included his CV and that of the second nominee, Seth Barkett, which are found on page two here. As expected, both appear to be highly qualified. The most recent filing (as of the end of May) announced AO Partners’ interest at 11.9%.
For my original discussion of AIRT, you can head back to my post from last year. Since that post, the company has reported two more quarters (possibly three by the time this is published). We’ve seen the company’s revenues continue to grow, with Q2 and Q3 revenues up 26.2% and 15% YoY. Operating margin is still a little light, predominantly as a result of slight gross margin compression. The company now has $6.8 million in cash with zero debt, representing 30.3% of its market cap.
The company’s enterprise value is just $15.7 million, against which it has earned an average free cash flow of $2.4 million over the last three years. The company trades for a P/B of 0.83, has been profitable since 2003 and the presence of an activist investor suggests to me that long suffering investors might find relief in the near future.
What do you think of AIRT?
Author Disclosure: None
Re Air T A Microcap Value Opportunity with Catalyst
Posted by: ry.zamora (IP Logged)
Date: June 22, 2012 11:00AM
What do you think of AIRT?
Well, as an investor in shares since the company "tanked" to $8.4 and below during the third quarter last year, it comes as a relief.
I analyzed this company myself on February last year (before I even learned about GuruFocus lol!) and, like you, arrived at a very favorable outlook for the stock. It was trading for $9.85 back then, and I calculated a fair value of about $24.6 under growth assumptions then believed to be reasonably conservative (rather than pessimist).
However, I haven't followed up the company yet (I really should), and if I did, I would have rehashed the stagnation and growth models I used to price the stock.
Nonetheless I am glad to know there are two other people out there who saw the same value in AIRT (including you), and one of them has the money to possibly unlock it.
Anyway, I saw this on your previous post.
The company’s contracts with Fedex can be terminated at any time on just 30 days’ notice – a scary thought indeed. Somewhat balancing this risk is the fact that Fedex has been a customer of the company for more than 30 years, so one could expect this to continue. Given the company’s reliance on Fedex, we have a situation where the company is absolutely undervalued should it maintain its relationship with Fedex going forward, but suddenly becomes drastically overvalued if you assume that relationship will end at any point during your investment holding period.
And I'm going to counter it with excerpts from my Feb 2011 analysis:
Ultimately, the inherent stability of Air Cargo's life is dependent completely on Fedex's business performance within the United States. However, Fedex's business is so good the business division will not likely drop out of business unless average number of packages delivered per day drops to levels far below the 7Y average of 2.74 million (in fact, I believe the *other 5* would be relinquished first since Air T has had a 30-year relationship with the courier company) OR unless something faster than air delivery is invented.
FedEx's business is characterized by: (1) gargantuan barriers to entry, (2) scale economies, (3) zero substitutes, and (4) a monopolistic playing field with UPS, USPS, and DHL.
Stepping out of Fedex's market and plunging further into Air Cargo's niche market, the two subsidiaries' operations are just as stable, as it enjoys the following advantages:
+ High barrier to entry: Air T has had a very long relationship with FedEx, which the company officially recognized. Any competitor must invest in the expertise of its aircraft operators and maintenance personnel. It also has to expend a lot of operating expenses on developing a business relationship with FedEx, or with any other large-scale courier company for that matter.
+ Zero substitutes: this is self-explanatory. FedEx's "Air Delivery" line of service carries no other substitutes except for "Land Delivery", which is in itself a separate business and has its own daily package volume and revenues.
+ Large market share: FedEx works with 7 contract cargo carriers, 2 of which are under Air T. The combined market share is believed to be larger than any of the individual slices controlled by the other five. Accurate industry data, however, is unknown as the other five are privately-held.
Essentially, FedEx has very high search costs if it decides to ditch two of its contract carriers at once. It has very little incentive to even reduce its air cargo business so long as domestic parcel deliveries remain as active as they are on a yearly basis going forward, which is likely given the characteristics of its business as I outlined before.
I would understand FedEx dropping its Air Cargo transport division significantly or entirely if the effects of the Euro Crisis and the upcoming US fiscal cliff were so apocalyptic every person -- institutional or individual -- stops consuming goods, stops sending out deliveries that cannot be digitized into a cloud, and stop doing business altogether.
Their parcel deliveries were at their low point on 2010 yearend -- 2.64 mil, compared to the peak of 2.82 mil by 2005 year-end, each netting FedEx a per package yield of $14.61, which is still higher than the 2003 yield of $13.8.