Air Transport Group (ATSG) a top small cap from the annual report that has not performed well this year, down 17% YTD, but has recently seen unusual buying of 6000 October $30 OTM calls, so worth taking a closer look. ATSG shares have moved sharply off July lows and recently pulled back to lower range support.

Air Transport Services Group, Inc. leases aircraft and provides airline operations, ground handling services, aircraft modification and maintenance services, and other support services to the air transportation and logistics industries. ATSG is a leading provider of aircraft leasing and air cargo transportation services in the United States and internationally. ATSG is the largest provider of passenger charter service to the United States Department of Defense and other governmental agencies. ATSG’s customers consist of e-commerce companies, air express integrators, freight forwarders, airlines and governmental agencies. ATSG offers a bundle of customized and differentiated services, including aircraft leasing, airline express operations, line and heavy maintenance, freighter conversions, material handling equipment and ground handling services,

ATSG has also been accelerating its plans for CAM utilizing Airbus freighters. Commenting on the last earnings call “At the same time, we are making plans to extend our leadership position as the world’s largest lessor of midsized freighter aircraft by adding another platform for growth, one that will have operational synergies with the A321. We recently acquired rights to 20 Airbus A330 conversion slots from Germany’s EFW for aircraft that would begin conversion between mid-2023 through the end of 2025. While the 767-300 will remain our primary midsized freighter growth engine for many years to come, we also see the A330 as an attractive platform with customer appeal and fleet synergies with the A321. We don’t anticipate investing in A330 feedstock until 2023. Though we believe securing conversion slots to be a wise investment, allowing us to continue to grow our leasing portfolio at attractive return targets while diversifying our lease options to customers.”

ATSG key business segments are CAM Leading, ACMI Services and Other. It acquired the passenger airline Omni Air in November 2018. Its portfolio of freighter aircraft is focused on mid-sized air freighters, which is the category of choice for express and e-commerce driven regional air networks operating both within and outside the United States.  Its freighter fleet is primarily Boeing 767 aircraft, which are in high demand because of their reliability, cubic cargo capacity and durable performance. ATSG has heavy customer concentration with the US DoD at 31%, Amazon at 30%, and DHL at 12%. The vast majority of ATSG revenues come from the cargo side of the business.

ATSG currently has a market cap of $1.88B and trades 6X EBITDA, 14.65X Earnings and 1.58X Book with revenues seen rising 7-8% annually in 2021 and 2022 and EBITDA up 7% and 9% respectively, a solid growth profile. ATSG has a steady ROIC of 5-7% the last few years and operates with 30%+ Adjusted EBITDA margins. Its Debt to Adjusted EBITDA ratio has come down to 2.8X in 2020 from a high of 3.6X. ATSG’s Our cargo airlines performed especially well in the second quarter, generating good growth from busier schedules and expansion of some transatlantic routes for DHL while ACMI Services segment is seen improving in 2H21.

ATSG noted on its call the strength in ecommerce with penetration remaining low globally and sees cross-border still in its infancy. ATSG noted “One is cross-border e-commerce, and that’s one where barriers are being worked on to come down, things like banking to do cross-border transactions. Customs clearance to do cross-border transactions are still a little clunky. So when those — as those barriers come down, that will accelerate the cross-border side of that. Of course, cross-border generally means airplanes.”

ATSG is a unique play in air leasing and should benefit from the current environment of ecommerce acceleration while rates and utilization are surging due to supply shocks. It offers cheap valuation with steady outsized growth and the longer-term outlook even more positive. Its major customers will continue to grow, and it is a backdoor way to play the strength of Amazon. ATSG should provide steady returns over the next few years while also being a potential M&A target.