The airline industry has been crushing it on the earnings front for years now, but investors remain dubious about the future, as witnessed by the consistently low price multiples placed on the majors. Ancillary air transport services have benefited greatly and two companies stand out most in terms of value - Air Transport Service Group Inc. (ATSG, Financial) and AerCap Holdings NV (AER, Financial).
Air Transport Services Group
Air Transport leases aircraft and provides airfreight and logistic services. The company's wholistic offerings encompass aircraft, crew, maintenance and insurance, where it generates the majority of revenue, as well as ground services and cargo management. It has a combined fleet of 55 owned freighter aircraft consisting of multiple Boeing (BA, Financial) aircrafts.
In the last 12 months, Air Transport booked record earnings of $169 million on $935 million in sales. Over the last decade, the company has done an excellent job growing its book value from $1.27 to north of $8 per share. So while the $2.33 in per-share earnings will be short-lived, the analysts expect it to earn over $1.65 a share in 2019 and north of $2 per share in 2020. At that rate and a modest price multiple, the stock could trade above $30 a share.
Air Transport is heavily dependent on three organizations, DHL, Amazon (AMZN, Financial) and the U.S. military, which collectively account for more than 76% of the company's annual revenue. Amazon specifically has an investment in Air Transport and has been reportedly looking to acquire a logistics company outright. Many believe it could be Air Transport. With $30 billion in cash, it would be a bargain for Amazon below $20 to $25 per share. In either case, the relationship with Amazon will likely keep the company profitable and growing for years to come.
AerCap is recognized as the global leader in the aircraft leasing business. Headquartered in the Netherlands, it operates in over 80 countries, with China, including Hong Kong and Macau, and the U.S. being big hubs for the company's 200-plus customers, which include major airlines like Qantas (ASX:QAN, Financial), American Airlines (AAL, Financial), Southwest (LUV, Financial) and Emirates.
AerCap is much larger than Air Transport with a $7.8 billion market capitalization versus $1.1 billion, and it has had a more consistent history of sales and income growth. The company has also done a great job building shareholder value, growing book from $13.04 to $60.36 a share. In the last 12 months alone, it generated over $1 billion in profit on $4.7 billion in sales. That's up big from the $152 million in earnings and $1.25 billion in revenue it booked in 2008.
More importantly, after increasing shares outstanding above 206 million in 2015, the company has bought back over 53 million shares in the last few years, helping to boost earnings north of $7 per share, where it's likely to come in each of the next two years. With the stock trading in the low-$50 range, AerCap is likely to earn 26% of its cap, net net, by 2020.
Risk versus reward
The risks in this industry come from capital spending, with both companies spending well in excess of net income. However, each also offers a different value proposition than simply buying stock in a major airline. Despite the high cost of capital, if Air Transport and AerCap continue to turn earnings into book value growth, the stock will follow along nicely.
Disclosure: I am not long or short ATSG or AER.
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