Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is basically a holding company, which owns its operating subsidiaries, Atlas Air, Inc and Titan Aviation Holdings, Inc, and has a minority stake in a few other companies.
Atlas Air Worldwide provides outsourced aviation operating services to the global aircraft markets. Currently, Atlas Air Worldwide runs a well-managed fleet of 747 and 767 freighters and 747 and 767 passenger aircrafts.
Atlas Air Worldwide mainly operates through three segments, which includes the ACMI (Aircraft, Complete Crew, Maintenance, and Insurance), Charter, as well as Dry Leasing.
In the ACMI segment, Atlas Air Worldwide has the world’s largest fleet of modern Boeing 747 all-cargo aircraft, and they provide aircraft, crew, maintenance and insurance services to customers. Under Charter segment, Atlas Air Worldwide offers customers air cargo and passenger aircrafts for moving goods and people from point A to B. Lastly, Atlas Air Worldwide operates its Dry Leasing business via Titan Holdings Inc, which is a freighter-centric leasing company with one of the world’s largest fleets of Boeing 777 freighters.
As of May 8, 2016, Atlas Air Worldwide had a market capitalization of around $1.18 billion and its latest quarterly revenue ((Q1 2016)) came out at $418.62 million.
Review of Q1 2016 Financial Results
On May 5, 2016, Atlas Air Worldwide released its Q1 2016 financial results, which showed a Net Income of $0.5 Million or $0.02 per Share.
Figure 1: Atlas Air Worldwide’s Year-to-Date Price Change
As soon as Atlas Air Worldwide made the press release, its stock price jumped from $38.28 at the close of May 4 and reached as high as $56.64 on May 5, representing a 47.96% increase within a day. However, year-to-date, it is only up 16.34%, based on the current market price of $46.79 per share.
This large upside move happened despite the fact that Atlas Air Worldwide’s revenue has fallen to $418.62 million in Q1 2016, which is 6.27% lower compared to the same quarter last year.
However, there were two factors that influenced the market: 1) the earnings, adjusted for non-recurring costs, were $0.31 per share, which beat Zacks Investment Research’s forecast of $0.25 per share, and 2) the deal with Amazon.com, Inc. (NASDAQ:AMZN) to provide and to operate 20 Boeing 767-300 converted freighters that will have a meaningful impact on Atlas Air Worldwide’s revenues in the coming years.
While better than expected adjusted earnings pushed the stock price up by almost 48%, we believe the Amazon deal with turn out to be more significant for the company as such a long-term relationship with one of the largest e-Commerce giants will create recurring revenue opportunity for Atlas Air Worldwide.
Commenting on the deal with Amazon, William J. Flynn, the President and Chief Executive Officer of Atlas Air Worldwide said that “the continuing expansion of Amazon’s e-commerce business and to enhance its customer-delivery capabilities, are expected to be meaningfully accretive to our future earnings and cash flows.”
“We expect this service to begin in the second half of this year, become accretive starting in 2017, and scale up to full service and full accretive benefits through 2018,” he noted.
Mr. Flynn also mentioned that the immediately accretive Southern Air acquisition has been completed. “our acquisition of Southern Air with its highly complementary 777 and 737 aircraft operating platforms will provide a broader array of services for customers and new avenues of business growth for us,” he said.
The agreement with Amazon and the successful acquisition of Southern Air will help Atlas Air Worldwide to offer some great upside potential for its secondary investors in the coming quarters.
According to TipRanks which ranks over 7,500 financial analysts and bloggers based on how well their calls perform, the analyst consensus on Atlas Air is Hold and the average price target is $55, representing a %19 upside.
Why The Amazon Deal Is Kind of a Big Deal
On May 5, Atlas Air Worldwide released a second press release detailing the Amazon deal, which mentioned that the long-term commercial agreements with Amazon will include “the operation of 20 B767-300 converted freighters for Amazon on a CMI (crew, maintenance and insurance) basis by Atlas Air Worldwide’s airline subsidiary, Atlas Air, Inc., as well as dry leasing by its Titan Aviation leasing unit.”
While the dry leases will have a term of 10 years, the CMI operations will be for seven years (with extension provisions for a total term of 10 years). The operations under the agreements are expected to begin in the second half of 2016 and ramp up to full service through 2018.
In order to align interests, Atlas Air Worldwide also offered Amazon an opportunity to buy 20% common stocks of Atlas Air Worldwide at $37.5 per share, where Amazon has the privilege for the next five years. In addition, Atlas Air Worldwide “granted Amazon warrants to acquire up to an additional 10 percent (after the issuance) of AAWW’s common shares at the same exercise price, over a period of seven years.”
With this deal with Atlas Air Worldwide, Amazon is practically cutting out the middleman. Instead of keep relying on FedEx, UPS, et al, who also lease cargo aircraft from companies like Atlas Air Worldwide, if Amazon start leasing directly, they will be able to cut down the cost of logistics. Meanwhile, having 20% to 30% stake in the company will also ensure that Atlas Air Worldwide will always have Amazon’s strategic interest in mind while making future operational deals with direct or indirect competitors of Amazon.
While the Amazon deal is great for Atlas Air Worldwide, it is even a better deal for Amazon, especially after they adopted a more aggressive policy to handle logistics themselves.
Winning a contract to lease 20 cargo planes to Amazon is a big deal, but this revenue will not be visible on Atlas Air Worldwide’s balance sheet immediately. However, since Amazon has the right to buy up to 20% common stocks of Atlas Air Worldwide at $37.50, it will immediately create a technical support level for the stock price.
Furthermore, the seven to ten-year deal will create a certain recurring that will bound to have a meaningful impact on the top line. Now the question would be how the management will turn this stable operating environment for the next decade to develop the company. In coming quarters, investors will be keen to see how Atlas Air Worldwide management plans to expand its business and how the key financial metrics are saying about that effort.
Meanwhile, Zacks has updated their price target for Atlas Air Worldwide to $52.9 per share on May 5, which still offers a 13.06% upside potential for secondary investors in the short term. In the long term, we believe the valuation will go much higher and long term investors should consider increasing their exposure at current price level.
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