Atlas Air Fully Valued After 13% Move?

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After the 13% rally in the past couple weeks, Atlas Air stock (NASDAQ: AAWW) looks fully valued based on its historic P/E multiples. Atlas stock has rallied from $16 in March to $61 at present, compared to the S&P which gained 51%. The stock has outperformed broader markets primarily due to increased demand for the company’s charter services supported by a reduction air freight capacity and disruption of the global supply chain. The stock is also up 50% from levels seen in early 2018, two years ago.

Atlas stock has surpassed the level it was at before the drop in February, thanks to the coronavirus outbreak that the company’s first quarter and second quarter revenues observed a 12% and 24% (y-o-y) growth, respectively. While the demand for air cargo is likely to remain for the remainder of the year, in reality, demand and revenues will likely trend downward as economies re-open and air freight capacity increases.

In the past two years, Atlas Air’s total revenues have increased by 27%, but the adjusted earnings have improved at a moderate pace leading to a 1-percentage point reduction in adjusted net margin.

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While the company has seen strong revenue and earnings growth over recent quarters, its trailing P/E multiple has jumped to the highs observed in 2017.  We believe the stock is unlikely to see significant upside after the recent rally as indicated by the high trailing P/E multiple. Our dashboard  What Factors Drove 4.2% Change in Atlas Air Worldwide Holdings Stock between 2017 and now? has the underlying numbers.

AAWW’s P/E multiple changed from around 12x in 2017 to 5x in 2019. While the company’s P/E is now around 12x there is a low upside when the current P/E is compared to levels seen in the past years. P/E of 12x at the end of 2017 and 6x as recently as late 2018.

So what’s the likely trigger and timing for stability in Atlas Air’s stock?

The U.S. Airline industry received a $25 billion bailout under the CARES Act to support employee costs for the second and third quarters. As the CARES Act grant runs out this month, the company will require additional funds to support its huge employee costs. While moderate growth in passenger numbers is easing margin pressure, the rising number of coronavirus cases has prompted many states to delay re-opening initiatives or put in place another round of restrictions. Considering the demand of $32 billion of payroll aid by the six aviation worker unions, another lifeline for the battered airline industry will also raise air freight capacity.

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