BUSINESS
Air Transport Services Group, Inc., together with its subsidiaries, provides aircraft leasing and air cargo transportation and related services in the United States and internationally. The company offers aircraft, flight crews, aircraft maintenance, aircraft hull and liability insurance, and aviation fuel services; and aircraft maintenance and modification services, including airframe modification and heavy maintenance, component repairs, engineering services, and aircraft line maintenance. It also provides equipment maintenance services; cargo load transfer and package sorting services; crew training services; and airline express operation, line and heavy maintenance, and ground handling services.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, ATSG is expected to continue to be a modest Value Builder.
Air Transport Services Group has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Air Transport Services Group has a very high Appreciation Score of 87 but a poor Power Rating of 21, leading to the Neutral Value Trend Rating.
Air Transport Services Group’s stock is selling well below targeted value. The current stock price of $13.37 compares to targeted value 12 months forward of $44.
Air Transport Services Group’s very high appreciation potential results in an appreciation score of 87 (only 13% of the universe has greater appreciation potential.)
Air Transport Services Group has a Power Rating of 21. (ATSG’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 21% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in ATSG’s earnings estimates has been unfavorable in recent months; recent price action has been unfavorable; and the Air Courier Services comparison group is in a slightly weakened position currently.
INVESTMENT PROFILE
ATSG’s financial strength is above average. Financial strength rating is 61.
Relative to the S&P 500 Composite, Air Transport Services Group Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ATSG is normal risk. Relative weaknesses include: low forecasted profitability, and high earnings variability. ATSG’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. ATSG has unusually low market capitalization.
CURRENT SIGNALS
Air Transport Services Group’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Air Transport Services Group’s current technical position is very weak. The stock price is in a 6.8 month down move. The stock has declined 28.2% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Air Transport Services Group Inc (NASDAQ: ATSG) has recently experienced small negative changes in fundamentals: significant quarterly earnings deceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
Air Transport Services Group Inc (NASDAQ: ATSG) has reported a loss for its fourth fiscal quarter (ending December 31) of $-0.24 versus $0.58 for the same period a year ago — a decline of -141%. This result fell short of the consensus estimate of $0.28 by $-0.52. For the latest four quarters through December 31, E.P.S. were $0.87 versus $2.67 for the same period a year ago — a decline of -67%.
Air Transport Services Group Inc (NASDAQ: ATSG) stock declined by -4.1% on 2/26/24. The shares closed at $13.37. Moreover, this decline was accompanied by unusually high trading volume at 193% of normal. Relative to the market the stock has been weak over the last nine months and has declined -9.2% during the last week.
CASH FLOW
In 2022, Air Transport Services Group experienced a very significant reduction in cash of -$42.4 million (-61%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$617.5 million. Non-operating sources contributed +$24.1 million (+4% of EBITDA). Cash taxes consumed -$26.2 million (-4% of EBITDA). Re-investment in the business amounted to -$678.7 million (-110% of EBITDA). On a net basis, debt investors contributed +$127.2 million (+21% of EBITDA) while equity investors removed -$106.3 million (-17% of EBITDA).
ATSG’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Air Transport Services Group Peer Group. In most years, Air Transport Services Group was in the top quartile and lower quartile. Currently, Air Transport Services Group is upper quartile at +4% of EBITDA (+$24.1 million).
ATSG’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Air Transport Services Group Peer Group. In most years, Air Transport Services Group was in the top quartile. Currently, Air Transport Services Group is upper quartile at -4% of EBITDA (-$26.2 million).
ATSG’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Air Transport Services Group Peer Group. (Since 2020 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Air Transport Services Group was in the lower quartile and third quartile. Currently, Air Transport Services Group is lower quartile at -110% of EBITDA (-$678.7 million).
ATSG’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Air Transport Services Group Peer Group. In most years, Air Transport Services Group was in the second quartile and top quartile. Currently, Air Transport Services Group is above median at +21% of EBITDA (+$127.2 million).
ATSG’s Equity Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Air Transport Services Group Peer Group. (Since 2020 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, Air Transport Services Group was in the top quartile and second quartile. Currently, Air Transport Services Group is above median at -17% of EBITDA (-$106.3 million).
ATSG’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Air Transport Services Group Peer Group. In most years, Air Transport Services Group was in the second quartile and top quartile. Currently, Air Transport Services Group is substantially below median at -7% of EBITDA (-$42.4 million).
ATSG’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Air Transport Services Group Peer Group. In most years, Air Transport Services Group was in the lower quartile and third quartile. Currently, Air Transport Services Group is lower quartile at +1%.
PROFITABILITY
ATSG’s return on equity has improved significantly since 2014. The current level of 8.7% is 1.37X the low for the period and is -5.5% from the high.
ATSG’s very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of ATSG’s assets declined over the full period 2013-2023: asset turnover has experienced a downtrend.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend even as it experienced a very sharp decline after the 2021 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
ATSG’s return on equity is at median (8.7%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is lower quartile (4.2%) reflecting asset turnover that is lower quartile (0.54X) and slightly above median pretax margin (7.7%).
Tax “keep” rate (income tax management) is at median (73.0%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the upper quartile (2.85X).
GROWTH RATES
Overall, Air Transport Services Group’s growth rate has slowed considerably in recent years.
Air Transport Services Group’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 14.9% per year.
Total asset growth has been 16.1% per year. (More recently it has been 5.0%.)
Annual E.P.S. growth has been 21.5% per year.
Equity growth has been 16.8% per year.
No consensus growth rate forecast is available for Air Transport Services Group.
Relative to the Air Transport Services Group Peer Group, Air Transport Services Group’s historical growth measures are consistently top quartile. Revenue growth (14.9%) has been upper quartile. Total asset growth (16.1%) has been upper quartile. E.P.S. growth (21.5%) has been upper quartile. Equity growth (16.8%) has been upper quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Air Transport Services Group’s stock price performance has been volatile and below market. Between April, 2013 and February, 2024, Air Transport Services Group’s stock price rose +132%; relative to the market, this was a -27% loss. Significant price move during the period: 1) May, 2016 – February, 2018: +109%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -45.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -45.3% is lower quartile relative to Air Transport Services Group Inc Peer Group.
Current 5-year total return performance of -8.2% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -8.2% relative to S&P 500 Composite, Air Transport Services Group’s total return performance is lower quartile relative to Air Transport Services Group Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, ATSG’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/assets, then by the ratio of enterprise value/revenue, then by the price/earnings ratio. The lowest factor is the price/equity ratio.
Relative to Air Transport Services Group Peer Group, ATSG’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the ratio of enterprise value/revenue, then by the ratio of enterprise value/assets, then by the price/earnings ratio. The lowest factor is the price/equity ratio.
Air Transport Services Group has a major value gap compared to the median. For ATSG to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.26X to 1.84X. If ATSG’s ratio of enterprise value/revenue were to rise to 1.84X, its stock price would be higher by $18 to $32.
For ATSG to achieve upper quartile valuation relative to the Air Transport Services Group Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.26X to 3.09X. If ATSG’s ratio of enterprise value/revenue were to rise to 3.09X, its stock price would increase by $59 from the current level of $13.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, ATSG is expected to continue to be a modest Value Builder.
Air Transport Services Group’s current Price Target of $44 represents a +231% change from the current price of $13.37.
This very high appreciation potential results in an appreciation score of 87 (only 13% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 87, the low Power Rating of 21 results in an Value Trend Rating of C.
Air Transport Services Group’s current Price Target is $44 (-10% from the 2022 Target of $49 but +231% from the 02/26/24 price of $13.37). This slight fall in the Target is the result of a +13% increase in the equity base and a -20% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
PTR’s return on equity forecast is 7.0% — slightly below our recent forecasts. Forecasted return on equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is significantly below the 2019 peak of 17%.
PTR’s growth forecast is 15.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2014 and 2022. The current forecast is significantly above the 2015 low of 2%.
PTR’s cost of equity forecast is 5.6% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2014 and 2022. The current forecast is well below the 2019 peak of 10.9%.
At Air Transport Services Group’s current price of $13.37, investors are placing a negative value of $-11 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 17.0% per year, and a return on equity of 9.0% versus a cost of equity of 6.7%.
PTR’s 2024 Price Target of $44 is based on these forecasts and reflects an estimated value of existing assets of $21 and a value of future investments of $23.
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