China continues to sneeze, and it has given industrial stocks in North America and Europe a pretty nasty summer cold. That's bad news for air cargo carriers like FedEx (NYSE:FDX) and Atlas Air Worldwide (Nasdaq:AAWW), which depend on strong cargo demand to and from Asia. While overall industrial demand in China is not looking strong yet, nor are current cargo trends in Hong Kong, there may yet be reasons to think that stronger demand late in the year can lift shares of Atlas Air.

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Load Up the Apples
It may sound ridiculous, but Apple (Nasdaq:AAPL) is a big enough force in the world now that its product cycles can actually influence price trends in the air cargo market. Back during the last iPad launch, for instance, Apple's moves to lock in air cargo capacity led to a 20% jump in rates. Oceangoing cargo rates are unquestionably lower, but Apple will not wait the weeks it takes to ship its latest products by boat. With a new iPhone, iPad and iPod all due later this year, Atlas Air could be the beneficiary of a meaningful recovery in rates tied to these launches.

But it's not just an Apple story anymore. More and more consumer, industrial and pharmaceutical companies are sourcing from overseas and switching to air cargo. Nike (NYSE:NKE), for instance, has increasingly switched to air cargo to get its latest releases on U.S. shelves faster and reduce its inventory risk. Yes, it costs more to use cargo planes, but keeping merchandise in warehouses on the West Coast costs money, too. Likewise, Atlas Air is seeing companies like Toyota (NYSE:TM) use more air cargo, and drug companies that want to source from overseas have little choice but to use air cargo in most cases.

SEE: How Inflation Has Affected Transportation Prices

What About Supply?
While demand may be increasing with time, air cargo supply seems to be on the way down. Air France-KLM (OTC:AFLYY), Cathay Pacific (OTC:CPCAY) and SingAir have all been reducing main-deck capacity. At the same time, many smaller air cargo companies are struggling, if not flirting with bankruptcy. While FedEx and UPS (NYSE:UPS) will pick up business, it ought to lead more and more forwarders and logistics companies to sign on with Atlas.

SEE: Tips For Skipping Air Travel

Still a New Equipment Play
Atlas Air is also still relatively early in its new equipment cycle, a shift that will see the company adding several Boeing (NYSE:BA) 747-800F cargo planes to its fleet. Here, too, the company enjoys an advantage over smaller struggling competitors. Atlas Air has been getting quite favorable financing rates recently, and these new plans ought to improve the company's operating efficiency (new planes are more fuel efficient and need less maintenance). On the other hand, while smaller rivals may be able to stay in business, it seems improbable that they will be able to secure the financing necessary to upgrade their fleets, placing them at an operating disadvantage.

SEE: 7 Air Travel Perks That Used To Be Free

The Bottom Line
From a value/fundamental investing standpoint, there's plenty to dislike about Atlas Air. For starters, the company still has a sizable military cargo/transport business that should be liable to lower defense budgets and fewer overseas deployments. Management is looking to replace this with more charter and commercial business, but so far that transition is still at risk. It's also well worth noting that things could get much, much worse in the air cargo market, particularly if the global economy slides further toward recession. Last and not least, this is a company that seldom produces multiple consecutive years of positive free cash flow, and that often stands in the way of substantial long-term value accretion.

All of that said, not every stock transaction has to be made with an eye toward holding for five years or more. While Atlas Air stock is near a 52-week high, it has room to go before it touches prior long-term highs, and a recovery in rates and activity later this year could be just the trick. This stock could appreciate another 30% before reaching the lower end of its normalized forward multiple, and that suggests an interesting trade for the back half of the year.

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

Tickers in this Article: AAWW, FDX, UPS, AAPL, TM, NKE, AFLYY, CPCAY, BA

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