Contributing editor Glenn Rogers is with us this week with a new recommendation. Glenn is executive chairman of RAEN and a board member of Poler Inc. He has worked with private equity and venture groups on a variety of projects leading to successful exits for the investors. He recently was part of a group that sold a large beverage company to Amway. Glenn has worked in senior positions in both Canada and the U.S. and is a successful investor. He lives with his family in southern California. Here is his report.
Glenn Rogers writes:
I've been trying to figure out a way to benefit from the recent meltdown in oil prices and the ongoing woes of the west coast ports, which will surely negatively affect economies worldwide and particularly in the U.S.
I didn't hear anyone predicting that oil would drop as far and fast as it has but there are now plenty of people trying to predict where it's going from here. The last few weeks have seen crude bounce back from recent lows but there are still a number of analysts who are forecasting that we will see $30 oil before this is all over (prices in U.S. dollars). If that's true, countries like Russia and Venezuela will be a lot of trouble. That would not make a lot of people around here very upset but it does lead to the destabilizing of global geopolitics.
Other analysts are calling for $50-$60 oil becoming the new normal for a while but no one seems to think prices are going to spike back up any time soon - which, if you're a contrarian, likely means they will.
When there is price disruption at this level in a basic commodity you can be sure there will be plenty of winners and losers. Among the winners are the transport companies, particularly the airlines. I've done very well with my airline trades over the last several months but lately they have begun to roll over as there has been a rebound in oil prices. Forgive the pun, but airlines stocks could take off again in a big way if we see oil prices beginning to drift closer to the $30 level. But bullish oil plays have been the way to make money over the last few weeks. Some of this has been the result of short covering rallies and reflects the fact that energy stocks were probably oversold, other than the major integrated producers, which have hardly moved at all.
As for the shipping dispute, a large number of container ships are anchored off west coast ports particularly in Long Beach and Los Angeles. Both are huge gateways, handling some 40% of the nation's incoming container cargo worth over $1 billion daily. There are also work stoppages in the other 27 ports up and down the west coast. The dispute is is affecting all sectors of the economy including agriculture, retail, manufacturing, etc. The dockworkers belong to some of the last powerful unions in America and they are likely to remain that way until the Panama Canal widening is finished next year. Once that work is completed, shippers will be able to bypass west coast ports and bring goods into Corpus Christi, Houston, and New Orleans, thus weakening the unions' control. But until that time, the unions are able to hold the country to ransom and they are doing so.
All this being said, I found a company that is well positioned to benefit from the oil decline and the labour uncertainty that we are facing. That company is Atlas Air Worldwide (NDQ: AAWW). Atlas is a major player in the global airfreight business. The company occupies an interesting place in the system in that it provides aircraft leasing, flight crews, maintenance, insurance, and flight crew training to a large group of well-known customers like FedEx, DHL (which owns a stake in Atlas), and many others including the U.S. military. The company also provides commercial passenger charters for the military and for college and professional sports teams. In many ways, Atlas is a financing business since it provides the means for companies to expand capacity without putting up the cash themselves.
Because of the woes at the ports, many customers are now choosing airfreight as an alternative to shipping by boat and rail. Normally airfreight is a more expensive alternative but, with the price of jet fuel dropping dramatically, air freighters are able to be more competitive. Given the fact that the only way to get things reliably from China and other parts of the world is currently through airfreight, companies like UPS and FedEx will benefit, at least in the short term. This should help propel Atlas while the dock mess is being sorted out. It may be that the ripple effects of the port strikes could lead to a longer-term benefit to the airfreight companies and therefore to Atlas, which should result in a very strong 2015. The longer fuel costs stay down, the better it is for the air freight customers, which in turn helps Atlas.
Recently the company reported fourth-quarter and full-year results for 2014. Fourth-quarter results produced net income of $41.6 million, which compares with $30 million in the fourth quarter of 2013. Free cash flow was $97.2 million, which compared with $92 million the year before. The full year income was $106.8 million ($4.25 per share) compared with $93.8 million in 2013.
The company added to its fleet of Boeing 777 freighters, giving it a total of six that are leased to customers on a long-term basis. Atlas forecasts increased airfreight demand of 4%-5% in 2015, which will outpace the projected growth in global trade. Low interest rates also help the company finance its airplane purchases and locks in a better spread between the cost of capital and the rate it can charge its leasing customers.
Recently, the stock pulled back is currently trading at $47.23, which is 7.4% below its 52-week high. The company is not expensive, trading at a trailing p/e ratio of 12.5.
Action now: Buy with a target of $60.
