zwalt99 (98.34)

AIRT -- Risks in Business Model vs. Very Favorable Valuation

October 25, 2010 – Comments (1) | RELATED TICKERS: AIRT

Air T operates in three segments – Overnight Air Cargo, Ground Equipment Sales, and Ground Support Services.  Overnight Air Cargo (47% of sales and operating income) services one customer – FedEx.  Ground Equipment Sales (42% of sales and 70% of income) primarily sells deicer to the US Air Force.  Ground Support Services (11% of sales and 22% of income) relies heavily on one contract with Delta Airlines.  In all, the big three customers account for approximately 75% of sales.  Corporate office costs bring the aggregate percentage of operating income back down to 100%.

Air T has been a vendor to FedEx since 1980, but the contract allows for FedEx to terminate with 30 days notice.  This obviously hangs large over the company’s future, but FedEx uses about 30 vendors in this niche. Air T is the only public company, and is likely the largest.

The company has been a vendor to the Air Force since 1999, but the contract terms have become shorter and shorter.  They are now working with 1-year options on the current contract through July 2014. 

The company’s contract with Delta was originally signed with Northwest Airlines to provide ground support equipment.  They recently announced a new contract with Delta that will decrease the scope (and income) from that customer by about 50%.

Given the risks involved with relying on a few customers, the company is still unfairly valued.  Cash less total liabilities is over $1.00 per share.  The company has net current assets of $8.61 per share.  With a share price of $8.69 as I write this, all fixed assets and future earnings of the company are valued at $.08.  Even if all three major customer contracts go away and the company liquidates, investors will get their money back.

With two large contracts on shaky ground, future profitability will not likely match the past.  However, the good news is that the company is still profitable.  They earned $0.12 per share in the first quarter without delivering any orders to the Air Force (they have orders to deliver during the rest of 2010).  With the company valued below book, any future profitability makes for a nice margin of safety. 

As long as your portfolio is already well-diversified, I think this stock is worth the risks.