Investors know that transport stocks can be a good way to play fundamental macroeconomic trends; North American railroads like Union Pacific (NYSE:UNP), for instance, have done quite well since the United States economy started to pull out of the recession. Likewise, the recent malaise in the global economy (particularly Europe and China) has done no great favors for international cargo carriers like UPS (NYSE:UPS) and FedEx (NYSE:FDX). Air cargo has definitely stagnated of late. While conditions haven't seen the crisis levels that some seaborne shippers have seen, companies like Hong Kong Airlines and Cathay Pacific have seen significant declines in cargo volumes and have been cutting back on capacity. This is bad news for air cargo players like Atlas Air (Nasdaq:AAWW) and Air Transport Services Group (Nasdaq:ATSG) as well, but the question remains whether this market will rebound later this year. While I recently highlighted Atlas Air as a worthwhile stock to consider as a late 2012 rebound play, more aggressive investors may also want to consider Air Transport Services.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

It's been a Tough Year so Far
This hasn't been an easy year for Air Transport Services, as the company has had to digest the loss of a major customer and delays from many others. In the second quarter, for instance, reported revenue fell nearly 40% on a year-to-year basis, and mainly due to a nearly 26% drop in ACMI revenue. Air Transport Services saw its ACMI block hours decrease 15%, due in large part to the loss of Schenker as a customer. If there was good news, though, it was in the sequential improvement in ACMI performance and the 15% increase in ex-Schenker block hours. That said, it's not just about revenue. While cost controls kept the decline in operating income limited to about 5% and adjusted EBITDA fell about 8%, management cut its EBITDA guidance by 10% (the second straight cut in guidance). Management is taking steps to restructure in the wake of losing Schenker's business, including merging the two subsidiaries that served the customer, but many customers have dragged out the start date of lease agreements - forcing the company to foot the bill longer than anticipated.

SEE: Zooming In On Net Operating Income

Still Some Reasons for Hope
I don't believe that Air Transport Services is a lost cause. For starters, the company's relationship with DHL (a part of Deutsche Post) seems solid and revenue here is growing at a double-digit clip. What's more, Air Transport Services seems to be picking up incremental business from DHL - business that came about when the company decided to stop using a rival's older, less efficient aircraft. Frankly, I expect this to be an industry-wide trend - tougher times are going to force marginal competitors out to the fringes (or out of business altogether), and give Atlas and Air Transport Services a chance to fill the gap.

SEE: How Inflation Has Affected Transportation Prices

Air Transport Services recently secured a two-year agreement with the government that makes it the exclusive combi services provider to the U.S. military. In addition, companies like Apple (Nasdaq:AAPL) and Nike (NYSE:NKE) are increasingly turning to air cargo for their shipment needs, and this seems like the new normal for high-ASP products sourced out of Asia. It's also worth noting that Air Transport Services has, at least by the standards of this industry, a pretty clean balance sheet and a modern fleet. While business conditions have forced the company to delay an additional 767 rollouts, both Atlas Air and Air Transport Services should benefit by offering more modern, cost-effective fleets to cargo customers.

SEE: Dead Airlines And What Killed Them

The Bottom Line
Readers should not fool themselves into thinking that Air Transport Services is a safe stock or that a late 2012 cargo traffic rebound is in the bag. The company still has a high reliance on a relatively small number of customers and further deterioration in global air cargo traffic could really whack forward EBITDA estimates. On the other hand, a lot of these risks are known and the market has already marked these shares down. Even if Air Transport Services should trade at a 25% discount to Atlas Air, a four times multiple on current 2013 EBITDA estimates suggests a fair value above $7 for the stock. While FedEx, UPS and Atlas Air are all likely safer bets on an air cargo recovery, investors who really want to gamble on a rebound should consider the shares of Air Transport Services.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center