Atlas Air Worldwide (AAWW, Financial) or Atlas Air reported 13.6% first-quarter sales growth to $475.4 million early this month.
The $1.3 billion company also reported an unimpressive $752,000 loss compared to $471,000 in profits in the same quarter last year.
As observed, Atlas Air recorded a $787,000 charge in its discontinued operations, which was not discussed in the recent earnings news release as Atlas Air reviewed its adjusted* income from continuing operations.
*Atlas Air earnings release: We provide guidance on an adjusted basis because we are unable to predict, with reasonable certainty, the effects of outstanding warrants and other items that could be material to our reported results.
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“We are off to an exciting start in 2017.
“We are building on our 2016 achievements and growing our earnings this year.
“We will have a full year of contribution from Southern Air and expect a positive impact on our full-year results from our service for Amazon (AMZN, Financial). We placed our second 767-300 aircraft into service for Amazon in February and just added our third and fourth aircraft in May.
“In addition to announcing our first-quarter earnings and reaffirming our full-year earnings framework today, we are very pleased to have announced the placement of two of our 747-8 freighters with Cathay Pacific Cargo on an ACMI basis with service beginning in May.
“Cathay Pacific (HKSE:00293, Financial) is a prominent global airline based in Hong Kong and a standout performer in the air freight market. We are delighted to work with Cathay Pacific's cargo division to facilitate the strong growth of its global network.
“In addition to Cathay Pacific, we have recently announced other significant new customer agreements with Asiana Cargo, Nippon Cargo Airlines and FedEx (FDX, Financial) that will all contribute to earnings growth this year.
“Earnings in the first quarter were in line with our expectations and our outlook for the year.
“Consistent with our prior outlook, we anticipate that our adjusted income from continuing operations, net of taxes, will grow by a midsingle-digit to low double-digit percentage compared with our 2016 adjusted income of $114.3 million.
“Our view reflects our expanding business base and the ongoing development of our strategic platform. It also reflects solid demand from our customers, the benefits we expect from our fleet initiatives, and the steps we have taken to align our business with the faster-growing express and e-commerce markets.” – President and CEO William J. Flynn
In review, Atlas Air recorded an adjusted income from continuing operations, net of taxes, in the first quarter totaled $8.3 million compared with $7.7 million in the year-ago quarter.
The company’s shares fell 7.7% post earnings release.
Valuations
Brought by lower earnings in the recent quarter, Air Atlas’ trailing price-sales (P/S) multiple rose to 97 times vs. the industry median of 16.9 times but still trades below its book value with 0.83 times vs. industry median 1.2 times and a P/S ratio of 0.66 times vs. 1.07 times (GuruFocus data).
Further, Atlas Air has not issued any dividend payouts to its shareholders in the past decade.
Average 2017 sales and earnings per share indicated multiples of 0.61 times and 10.7 times.
Total returns
Atlas Air failed to outperform the broader Standard & Poor's 500 index in the past five years with 0.12% total returns vs. the index’s 14.5% (Morningstar data). This year, the company provided 5% total losses to its shareholders while the index provided 7.6% total gains.
Atlas Air Worldwide
According to filings, Atlas Air Worldwide was incorporated in 2000 and operates as a holding company. As of recent annual filing, the company owned outright two airlines: Atlas Air and Southern Air. Further, Atlas Air also owned 51% of Polar Air Cargo Worldwide and also owned dry leasing services collectively referred to by the company as Titan.
Revenue per country was not provided by Atlas Air.
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“Given the nature of our business and international flying, geographic information for revenue, long-lived assets and total assets is not presented because it is impracticable to do so.” – Atlas Air 10-K
Meanwhile, the holding company had three reportable segments: ACMI, Charter and Dry Leasing.
ACMI
According to Atlas Air, the ACMI segment provides aircraft, crew, maintenance and insurance services to customers.
In the first quarter, sales in ACMI grew 9.8% to $200.7 million or 43% of total unadjusted sales, and delivered a direct contribution*** margin of 17.9% vs. 13.5% in first-quarter 2016.
***Atlas Air 10-K
“We use an economic performance metric ('Direct Contribution') that shows the profitability of each segment after allocation of direct operating and ownership costs. Direct Contribution represents Income (loss) from continuing operations before income taxes excluding the following: Special charges, Transaction-related expenses, nonrecurring items, Losses (gains) on the disposal of aircraft, Losses on early extinguishment of debt, Unrealized losses (gains) on financial instruments, Gains on investments and Unallocated income and expenses, net.”
Charter
The Charter segment provides full-planeload air cargo and passenger aircraft charters to customers, including the U.S. Military Air Mobility Command, brokers, freight forwarders, direct shippers, airlines, sports teams and fans and private charter customers.
In the first quarter, sales in the Charter segment grew by 20.6% to $243.9 million – 52% of total unadjusted sales –Â and delivered a company metric margin of 7%, which was lower than last year's quarter’s 10.3%.
According to Atlas Air press release, the lower Charter segment contribution during the period reflected an increase in heavy maintenance costs and lower average rates. Also, the average Charter rates during the quarter primarily reflected a reduction in cost-based rates paid by the military.
Dry Leasing
The Dry Leasing segment provides for the leasing of aircraft and engines to customers.
In the first quarter, sales in the Dry Leasing business fell by 5.1% to $26.8 million and delivered a company metric margin of 36.3% (highest among all segments) –Â about a similar level of profitability when compared to the same quarter last year.
On average, Atlas Air had three-year sales growth of 3.6%, profit decline rate of 23.8% and profit margin of 2.9% (Morningstar data).
Cash, debt and book value
As of March, Atlas Air had $109.1 million in cash and cash equivalents and $1.98 billion in debt with debt-equity ratio of 1.31 times vs. 1.28 times the year-earlier quarter. As observed, the company added $110.8 million debt since the last-year quarter but also increased retained equity by $504.6 million which moderated the leveraged balance sheet.
Of Atlas Air’s $4.4 billion assets 2.6%Â were identified as intangibles while having had a book value of $1.51 billion vs. $1.46 billion back in first-quarter 2016.
Cash flow
In the first quarter, Atlas Air’s cash flow from operations was at $18.7 million compared to $19 million a year ago earlier. Despite the losses in the quarter mentioned earlier, Atlas Air was able to bring in positive operational cash flow secondary to increase in "Provision for allowance for doubtful accounts" and "Unrealized loss on financial instruments."
Capital expenditures, including payments for flight equipment and modifications, were $140.6 million leaving Atlas Air with $121.9 million in free cash outflow vs. $75.5 million in outflows in the same period last year.
Nonetheless, Atlas Air was able to provide $9.43 million in share buybacks during the period. On average, the company repurchased 177,000 shares for $53.2 each –Â 7.4% higher than the share price of $49.6 (at the time of writing).
In review, Atlas Air had $301.9 million in accumulative free cash outflow in the past three fiscal years while it was able to repurchase $57.3 million shares in value.
The company also generated $102.8 million in debt proceeds net payments. Contrast to the first-quarter debt activity, Atlas Air has been net debt payer in recent years.
Conclusion
Steady sales growth and one-time charge secondary to a discontinued operation may just be a hiccup for Atlas Air. The company’s division seemed to carry on and delivered regular company-defined profitability measures except for its largest segment (for the quarter), which was its Charter business.
The company seemed to have a solid-state of balance sheet (minimal goodwill and intangible elements), but still has have a good amount of debt. Atlas Air also appeared to be rewarding to its shareholders through its buyback measures despite fluctuating free cash flow performance in recent fiscal years.
In addition to these findings, the company has had a deal with Amazon going back to May 2016 when Atlas Air issued a warrant enabling Amazon to purchase 20% of the company for $37.5 per share.
Meanwhile, eight analysts had an average price target of $67 per share –Â considerably way higher or 35% upside from the share price of $49.6 (at the time of writing).
Contrary to these analysts’ targets, Atlas Air would be a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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