Company is the legacy carrier serving DHL. When DHL bought Airborne 2 years ago DHL was required to divest ABX due to US Regulation of foreign entities (DHL is a German company) owning air carriers on US soil.
The company currently generates 98% of its revenue from DHL. Contracts are in place for appr 60% of this business until 2010. The remainder of the business (the sorting business) represents on the order of 40% of business that while not under contract, DHL has no real intention to take the business in house due to its favorable economics.
The favorable economics I speak of is the cost plus pricing ABXA gets from DHL. So essentially most cost are paid for by DHL and a small spread is applied for a profit margin to ABXA. If the company hits certain cost cutting intiatives their are incentive bonuses for ABXA.
The catalyst here is two fold. First the company is aggressively growing its non DHL business which represents 2% of revenue but 30% of profit. The reason being is that due to contract terms between DHL and ABXA, DHL must reimburse all costs at ABXA until DHL represents less than 90% of revenue. So with significant room to grow, the company is getting huge profit margins on the non DHL piece.
From a valuation standpoint, the company is trading on the order of 5.0x 2005 FCF. FCF should increase substantially in 2007 and out as capex is lowered from aggressive spending in 2004 and 2005. Furthermore, the company just got the approval to start a sharebuyback program providing stability to existing stock price.
$5.42 (08/29/06)
