Era Group (ERA, Financial), provider of helicopter transportation services primarily to oil and gas companies, suffered in 2014 as oil and gas prices slumped. From a high of $34.0 on December, 2013, the stock slumped to $20.8 by October 20, 2014.
Since then, the stock has moved largely sideways even as oil prices have taken a beating. In my view, Era Group has bottomed out and investors can consider gradual exposure to the stock with a long-term view.
I must add at the onset that there are other players in the helicopter service market such as Bristow Group (BRS, Financial) and CHC Group (HELI, Financial). However, I am bullish on Era Group for the undervaluation that will be discussed in the article.
On January 14, 2015, Era Group announced that it has secured contracts for three additional medium helicopters in the Gulf of Mexico.
The helicopters, which include two Sikorsky S-76s and one AgustaWestland AW139, will be used to support drilling programs and various projects for three of the company's oil and gas partners. Since this announcement, the stock has moved higher, and I believe that new contracts in challenging times is a big positive as it underscores the company’s customer relation and competitiveness even in difficult times.
Further, I would also like to add here that Era Group is maintaining growth and the company has the delivery of three helicopters in 2015 and five helicopters in 2016. This will further add to the company’s revenue and cash flow visibility.
The biggest concern for Era Group is the fact that the company’s operations are focused on North America and the company derives 85% of its revenue from the region. With the decline in oil prices, the offshore activity is likely to be hit and impact the company’s growth. However, the latest contracts show the moderate growth will continue even in challenging times.
Another big reason for strong resilience in the company’s stock is the fact that helicopters retain significant value over their useful lives. From this perspective, Era Group is trading at very attractive valuations. Considering the fair market value of helicopters and the company’s debt, the net asset value comes to $680 million or $44.36 per share (excluding deferred tax) and $33.70 per share (including deferred tax).
Therefore, at a current market price of $22.69, Era Group is significantly undervalued and for the same reason I stated earlier in the article that the stock has very limited downside. On the other hand, the upside potential is significant and considering the net asset value, the stock has the potential to trend higher by 50% to 100% over the next 2-3 years. The key to robust stock upside remains recovery in oil prices.
From a asset sale perspective, I want to mention here that Era Group has sold 89 helicopters in the last 10 years, and the company has realized a gain on sale of nearly $75 million during this period. This backs my point that helicopters have a high residual value and also backs the valuation argument presented above.
Arnold Van Den Berg (Trades, Portfolio) from Century Management has added Era Group to his portfolio of holdings, and he currently has 855,409 Era Group shares in his portfolio. The primary reason for this stock pick is the big undervaluation.
Even from a forward (December 2015) PE perspective, Era Group looks attractive with the stock trading at a PE of 16.7 and a five-year expected PEG of 0.86. Therefore, the stock clearly has big upside potential while the downside is limited by very attractive valuations.
My view is that investors can consider exposure to Era Group at current levels. I want to also add before concluding the Brazil can be the next big market for the company and the market holds big long-term potential. Therefore, the ideal investment view should be long term.
