DD: Atlas Air (AAWW) is laughably undervalued and has near term catalysts for a rapid revaluation
As always, do your own due diligence and invest responsibly. Author claims no responsibility for the accuracy of the facts and statements in this report. The investment ("YOLO") below is a large but recoverable percent of my portfolio, in-line with my personal risk tolerance. Not intended as investment advice. I may modify (add, reduce, or even close out) my position at any time.
TL/DR: AAWW is critically undervalued. COVID has all but annihilated international air travel volumes, driving up the price of air freight. Short term shipping disruptions have caused prices to soar, spilling over in to the air freight market. Analysts are expecting this disruption to resolve quickly, but are missing the shifts that airlines are making to narrow body jets and the impact on air freight. AAWW will have high earnings for years, and its current P/E of 4 is a joke. 13.6% of the float is shorted, and Atlas Air is free to reinitiate buybacks at the end of this month. AAWW’s market cap could double and it still would trade at the rock bottom P/E of 8. Bullish AF.
Atlas Air Worldwide (AAWW) is critically undervalued at an absurdly low valuation given its great near- and long-term prospects; there several upcoming catalysts for a rapid revaluation.
Atlas Air is an outsourced air services company that provides charter and other air services ("Airline Operations") as well as leasing out their owned aircraft. Critically, the Airline Operations account for the vast majority of revenues (>95%), and AAWW has a very, very heavy focus and exposure to air freight.
You may know that commercial flights also typically carry cargo. When COVID decimated international air travel, it left a few limited carriers to ship air freight internationally. Atlas Air filled that void and is making big money doing it.
Short Term Prospects
Beyond the COVID situation mentioned above, oceanliners have been backed up dramatically causing a squeeze in ocean freight prices. Normally, air freight costs very roughly 4-5x that of an oceanliner. But with surging rates from oceanliners, air freight has now become competitive for many companies and it is spilling over in to a squeeze on air freight. Here’s another article joking about car tires flying first class. So we know that Atlas Air is going to have a pretty stellar third quarter. One for their corporate history books, to be sure. But how do they fare long-term?
Long Term Prospects
As a side note, I believe this is where the shorts are getting it very, very wrong. I think they are confident that while AAWW will have a great quarter, the freight rates will come back down again and AAWW will operate with only ‘modest’ profits like it did pre-COVID. What they are missing is a huge transformation in the airline industry from wide-body to narrow-body jets. Narrow-body jets carry far less cargo. Greenlight Capital did a fantastic job laying this out in it’s July 26, 2021 investor letter (page 4, "Air Freight"):
While there has been some recovery in passenger aviation, airlines are emphasizing narrow-body planes, which carry less freight than wide-body planes. Compared to 2019, current air freight demand is about 10% higher and capacity is about 10% lower. The result is that cargo rates have exploded.
Supply will be slow to come on-line. Some passenger planes are being converted to freighters, but conversion capacity for wide-bodies is limited and the aggregate impact of this will be modest. Meanwhile, air freight companies trade at tiny multiples of what investors assume to be peak profits. The implied cost of equity is quite high, which makes it difficult to justify adding assets. As a result, air freight companies are in no rush to order new planes, and in any case, new orders would take several years to build. The result is rates and profits are likely to be higher than expected for quite some time.
(Sorry, I tried to link the letter but the spam bot didn’t like the URL.)
For some reason I will never understand, at a P/E of 4 with incredible foreseeable cashflows, some people have decided to short 13.6% of the outstanding shares. To be clear, this is not GameStop. But it is a high short interest in a stock with earnings prospects surging by the day as freight rates increase. It certainly doesn’t hurt. But the story gets even better…
Okay, so perhaps you believe me that AAWW is critically undervalued, that they’re going to make some amazing Q3/Q4 profits, and that their long term prospects are pretty fantastic too. What will drive this rapid revaluation in the coming months? The answer was subtly slipped in to the last earnings call (google "AAWW Transcripts Q2 2021 Earnings Call"). Spencer Schwartz, the EVP and CFO answered a question and stated:
As far as the CARES Act restrictions, so the restrictions with regard to not being able to pay dividends or repurchasing shares, those expire at the end of September.
I simply cannot imagine that in this time of record earnings, AAWW will not return that value to shareholders. If they were to announce a share buyback once the CARES Act restrictions lap, we could see AAWW finally get to a reasonable share price. I truly believe this could double in the short-term.
$108k YOLO on Calls expiring in October and January.
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September 15, 2021 at 09:48AM