Amazon.com Inc. (NASDAQ:AMZN) is taking over the world, and the AMZN stock price is following. However, it cannot do it without help. It needs lots of help to deliver all its packages and an army of drones isn’t going to suffice.
That’s why it set up a strategic partnership with and purchased warrants in two air freight carriers: Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) and Air Transport Services Group Inc. (NASDAQ:ATSG).
For the former, Atlas Air is a solid and robust air cargo business. Prior to the AMZN deal, it was flying 49 planes, mostly 747’s. Its operation is global, and growing nicely.
AMZN and Airlines
Airlines of any kind don’t grow YOY for the most part, as far as net income, because of the need for capex. Smaller companies like this will have on and off years for capex.
AAWW stock had $107 million in net income in FY14, and $7 million in FY15, thanks to an additional $188 million in capex. Net income was back to $41 million in FY16 and $59 million in the TTM.
Amazon was handed warrants as part of the strategic deal. Purchase of these warrants could mean AMZN taking over 30 percent of AAWW until 2022, at a price of only $37.50.
Now, on the day of this big announcement, AAWW stock rose from $37 to $47per share, has since risen as high as $67 and is now back to $53. There’s no reason for the decline, so it’s a buy.
ATSG stock made a similar deal, with warrants that could mean 20% ownership for AMZN at a purchase price of $9.73 per share. ATSG jumped from $11.50 to over $14 after the news broke. ATSG stock has hit $26.75 and is presently at $23.33, also a buy.
ATSG is growing revenues very quickly, up 35% from FY14 to FY16. Like AAWW, its bottom line is all over the place but was $30 million in FY14, $41.2 million in FY15, and $23.5 million in FY16.
Why do these deals? AMZN has tons of money, and tons of free cash flow. Right now, AMZN relies on FedEx Corporation (NYSE:FDX), United Parcel Service, Inc. (NYSE:UPS) and the USPS to deliver its stuff.
If AMZN just went out and bought its own freight operation, then he has more leverage over these entities. Hence, I believe Bezos will not be satisfied with just 30% of Atlas and 20% of ATSG, but buy them both in full.
This is the forward thinking that one gets with AMZN. Air freight transport is also a nice, boring business that nobody thinks about. It’s a Peter Lynch play.
Both companies are managing nicely, balancing revenue with growth and capex. Both companies have upside, although I think AAWW has more. The 25% drop in AAWW stock seems totally unwarranted, given that it continues to grow, and Amazon just continues to grow its business as well.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns AAWW and ATSG stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
