AIR T (AIRT) reported strong earnings growth and a large backlog today, giving the stock a sizeable “POP,” aka +28.4%.
I wrote about AIRT for MarketThoughts in March, and picked up some shares later that month. Here’s part of what I wrote:
Any viable business concern that trades close to book and below revenues has value potential; the cash on hand, lack of debt, and low expectations reflected by a P/E under 10 are intriguing to me, as well.
There are technical matters to contend with, as well. The stock price is seriously beaten down, with a –32% YOY change, and a recent earnings “disappointment” contributing to that, with a price fall from the high eights/low nines into the high sevens/low eights in early February, which incidentally was when the stock hit my value radar. With a float of only 2.5 million shares, there is tremendous “leverage” if/when any institutional buyer takes notice. The stock is owned by insiders to a reasonable degree, about 8%, and under-owned by institutions at about 10%, with no appreciable short volume. Turnover is running at about six months for the float, which is pretty fast for a stock this size. The last two earnings announcements have contributed to that volume. Three insiders have purchased decent blocks of the shares at prices above current, in the last months of 2006.
The company is certainly valid as a going concern. They have a ten-year history of earnings without a losing year, and while the earnings growth is not as consistent as I would like, the general trend has been up, and the dividend has been growing. Interestingly, they set their dividend rationally, bringing it down or up based on profit levels. This is not something the Street loves, but if one likes to buy companies this might be of interest. The dividend is paid annually and is now about 3.2% in yield, with a 2.8% 5-year average yield. The payout ratio is low at 30%, and the next ex-div date will likely be in June.
Generally speaking, the earnings have been of high quality, with operating cash flow exceeding net income and with negative cash flows from financing. The kicker has been the last calendar year, specifically the third quarters of fiscal 2006 and 2007, in which the company took changes in working capital that caused net income to exceed cash from operations. Typically these accruals are signs of potential earnings shortfalls – guess what, the company already had those! That is the reason for the company’s current bargain price. Is it a coincidence that the company selected a new CFO in October of 2006, not long before the first shoe dropped in November, and half a year before the other shoe dropped in February? How many shoes could the company have?
Pradeep over at Stockbee calls this kind of move an episodic pivot. I tend to agree that gaps from a fundamental catalyst have good odds of running, but that big a move might be all she wrote. I dunno. Now that it’s passed this important catalyst, I will probably put a trailing stop under the stock and forget I own it.
[Edit - trailing stop will be four times yesterday’s 45-day ATR, or $0.71. Willing to give up 1/3 of today’s gains in hopes of getting a significant run after the gap.]
