ATSG

[txlaw]

Myth, you're probably right about just holding on. 

 

Thanks Vanshon for posting the transcript.

[bookie71]

Dumb question:

Is an impairment charge deductible for taxes or is it a reserve similar to allowance for uncollectibles that isn't deductible.

[Myth465]

Seems like this is really running this week. I wonder who is buying.

[sswan11]

Re txlaw's analysis:  any guess on intrinsic value?  Just throw a multiple on estimated earnings?

[txlaw]

Re txlaw's analysis:  any guess on intrinsic value?  Just throw a multiple on estimated earnings?

 

Well, I'll leave it to you to come up with your own estimation of intrinsic value, but the way I value most companies is by thinking of them as equity-bonds.  I try to figure out what the owner earnings yield will be over several years at the price I have paid, usually by making very conservative estimates of owner earnings.  I then try to figure out what the earnings yield should be based on the risk involved in the business.  I usually take into account debt by adjusting the market price by adding in net debt per share.  However, I will sometimes modify this approach, for example, if we're dealing with nonrecourse debt.  Note that companies with lots of debt allow for huge run ups before you get to the intrinsic value earnings yield. 

 

For this sort of going concern valuation, I generally try to pick businesses that should be around for more than 10 years because no one is going to give you back your principal if your business is dead after 10 years.  If the business is going to fail as a going concern over the long run, then I would generally go with a pure discounted cash flow model (cigar butt valuation).  With cyclical companies, you have to try to figure out what the earnings yield will be over the course of the cycle, though you can of course take advantage of Mr. Market's overvaluation at the top of the cycle. 

 

That's essentially my approach, which I am constantly refining.  Right now, I am considering SFK a learning opportunity.  I generally stay away from cyclical commodity industries that I think are in decline because it's hard to figure out the full cycle intrinsic value, especially when there is a chance that the investee company will go under due to the way it is financed.  But you also find opportunity in these situations, and I think that SFK investors are gonna do quite well over the short run.  We'll see.

 

[txlaw]

The annual meeting presentation was filed with the SEC yesterday: http://www.sec.gov/Archives/edgar/data/894081/000119312510117146/dex991.htm

 

The conference call is also available for webcast on ATSG's website. 

[Myth465]

All and all a decent quarter. Next ones the big one. ATSG was earning 2% market up the DHL revenue, that has to go up with the new agreement. The balance sheet is coming along nicely, and they are purchasing additional planes for $90 million. I am guessing to avoid the tax hit that's due in 2-3 years. The balance sheet isnt great now, but if they had a market cap of $750 million it wouldn't look so bad.

 

ATSG has been a big lesson learned, it was a bad investment at $6, a great speculation at .11, and an amazing investment at $2.5 after the DHL announcement. Also never cut your winners.

[txlaw]

I thought it was very interesting to hear them say that they have a 10% hurdle rate for the money invested back into the business. 

 

But I'm a little wary about adding even more planes to their fleet.  It might be better for them to just use excess cash to pay down debt and buy back some shares. 

[Myth465]

They had a good rationale against the buyback. They have to pay DHL 20 cents on the dollar for every share they buy back, or they can retain the cash and the debt owed to DHL will be amortized over 5 years cashless.

 

I dont like the new planes either. They should eliminate the workers retirement liabilities (market downturns will hit them twice), and pay down debt. I am for expanding when taxes come due, but this should be a year of rebuilding the balance sheet.

 

I think they have a lock on plane conversions and dont want to give that up. They can buy the planes used from airlines and convert them. My guess is they dont want to pay taxes, and want to keep the conversion going. I would like for them to lease all of the planes they have, pay down debt, terminate the retirement plan by paying it down and selling off the liability, and then work from 8-3 managing a business similar to SSW. At that point they can buy 1-3 planes a year, only after obtaining conversion slots and a long term contract.

 

Honestly what do I know. I am fairly simple and like to focus on 1 or 2 things. Management has been pissing us off, but making us tons of money. I thought they should just sign a deal with DHL to be bought for $7.50, but they bought another airline, and seem to like focusing on several things at once. Its worked for them so far.

 

I will watch and see, I will start to trim after Q3. Once we have a run rate cash flow and a non DHL balance sheet (proper working capital, low DHL receivables, and no DHL severance collectibles, we can properly assign a multiple.

 

I like 7-8x cash flow for FV (we have taxes which will need to be paid at some point, and also have a fair amount of debt), and I will start to sell around 7 and minimize the holding to a core 8% position or so.

[txlaw]

They had a good rationale against the buyback. They have to pay DHL 20 cents on the dollar for every share they buy back, or they can retain the cash and the debt owed to DHL will be amortized over 5 years cashless.

 

Oh, that's right.  I forgot about that stipulation attached to the promissory note deal. 

 

I dont like the new planes either. They should eliminate the workers retirement liabilities (market downturns will hit them twice), and pay down debt. I am for expanding when taxes come due, but this should be a year of rebuilding the balance sheet.

 

You're right on the money there.  Paying down the retirement liabilities is a great idea.

 

I think they have a lock on plane conversions and dont want to give that up. They can buy the planes used from airlines and convert them. My guess is they dont want to pay taxes, and want to keep the conversion going. I would like for them to lease all of the planes they have, pay down debt, terminate the retirement plan by paying it down and selling off the liability, and then work from 8-3 managing a business similar to SSW. At that point they can buy 1-3 planes a year, only after obtaining conversion slots and a long term contract.

 

I was thinking along those same lines.  I like the SSW model of finding business before committing. 

 

By the way, should I be doing some homework into SSW at current prices?

 

[rmitz]

They had a good rationale against the buyback. They have to pay DHL 20 cents on the dollar for every share they buy back, or they can retain the cash and the debt owed to DHL will be amortized over 5 years cashless.

 

In addition, the call alluded to other debt covenants they have that would prevent buybacks.  We'd have to look at the exact debt terms, but honestly the planes might not be an entirely bad idea.  I would hope that all the debt gets converted to longer term with better covenants.  I trimmed my position very slightly recently just to take my leverage to 0.

[Myth465]

Good point Rmitz, I forgot about that.

 

I owe JEast a few beers. I got a great return with HRP and am kicking myself for missing out on the early stages of SSW. I bought a small bit today at $11.50 3% position and want to triple down under $10. Picture the company surviving the worst downturn in shipping unscathed and contracts in tact.

 

Now model $2 plus in CF and the ability to continue buying ships in a cheap market via sale leasebacks with no dilution and thats SSW. At $6 its a steal at $10 we still should get a good return. I look at it like REIT or ATSG. It throws off cash and the assets have very long lives.

 

I listened to the conference call last night and reviewed the presentation provided. I recommend having a look if you have an Hour. Management also struck me as very high quality. They run the business the same way I would (counter cyclically). Much safer then KSP, but the return wont be as high.

[Myth465]

Here is another presentation.

 

http://www.sec.gov/Archives/edgar/data/894081/000119312510118607/dex991.htm

[Smazz]

Props to you guys who made multiples here - I like to hear those stories because Im not a 5 - 10 bagger type guy because of my "take profit" mentality.

 

Myth,

what did you see in this company way back at the $0.11 stage that made you commit or was it more a shoot fish in a barrel approach to penny stocks?  

 

What an enormous run!