Why Erickson Air Crane is an attractive investment opportunity

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Thesis overview

Erickson Air Crane (EAC) is a helicopter services company in transition. In 2013, EAC purchased Evergreen Helicopters (EHI) and Air Amazonas (AA), which will more than double the company’s revenue and increase its fleet from 20 helicopters to 87 helicopters and airplanes. The largest opportunity rests on the turnaround of EHI, which was an underperforming asset purchased at a distressed multiple. The situation is complicated and underfollowed because it doesn’t fall into a natural industry coverage bucket and has a small market capitalization. However, management is becoming more vocal as it seeks to attract an institutional investor base. If management is able to integrate and execute, leverage works in the equity holder’s favor and the stock could appreciate to $29 (50% upside) in the next one to two years.

Company overview

Erickson Air-Crane Inc. (EAC) manufactures and operates Erickson S-64 Aircrane (S-64) heavy-lift helicopters. The company operates through two segments, Aerial Services and Aircraft Manufacturing and Maintenance, Repair, and Overhaul (Manufacturing/MRO).

The Aerial Services segment offers a range of heavy-lift helicopter services using the company’s worldwide fleet, including firefighting, timber harvesting, and infrastructure construction and related crewing services for government and commercial customers.

The Manufacturing/MRO segment manufactures air cranes from existing airframes, produces components, and provides customers with MRO services. As of May 2, 2013, the company operated a fleet of 87 rotary-wing and fixed-wing aircraft, including a fleet of 20 heavy-lift S-64 Aircranes.

The company was founded in 1971 and is headquartered in Portland, Oregon.

EAC history

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The base Erickson Air Crane business has existed for 40 years and specializes in “lifting heavy things.” 50% of the company’s revenue is tied to firefighting, while other services include construction work and timber harvesting. EAC’s fleet of Aircranes (20) is capable of lifting 25,000 pounds, so expect to see them dumping water on forest fires in Colorado or carrying enormous logs from areas without forest road access. In its Oregon headquarters, EAC manufactures and maintains its aircraft.

The Market Realist Take

The company recently announced a corporate rebranding wherein the parent company’s legal name, currently “Erickson Air-Crane Incorporated,” will change to “Erickson Incorporated” on April 1, 2014. “Evergreen Helicopters, Inc.” was changed to “Erickson Helicopters, Inc.,” effective February 6, 2014.

Erickson Air Crane’s 3Q 2013 results announced in November showed that revenue increased 58%, to $120.2 million—primarily due to contributions from acquisitions. However, the company’s earnings fell 17.6%, to $14.5 million (or $1.05 per share) from $17.6 million (or $1.80 per share) a year earlier. Adjusted EBITDA was up 24% over last year, to $47.7 million. Erickson’s legacy business, excluding Evergreen Helicopters’ and Air Amazonia’s contributions, was down for the quarter, primarily due to a decrease in cost per hour and crewing services in Italy, coupled with lower North American firefighting revenues compared to a highly active fire season in the prior year’s third quarter. Moreover, the company saw a timing shift of contract activity in its South American oil and gas business and penalties for the Evergreen Helicopters fleet.

For 2014, Erickson expects revenues in the range of $385 to $395 million, adjusted EBITDA in the range of $104 to $110 million, and earnings per share of $1.00 to $1.25.

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Erickson is a leading operator and the manufacturer of the powerful heavy-lift helicopter, the Erickson S-64 Aircrane, and its management has focused on diversifying and expanding the company’s revenue opportunity and geographic reach with the acquisitions of Evergreen Helicopters and Air Amazonia. The company incurs 40% of its revenue from the U.S. Department of Defense and could see impact from defense budget cuts and sequestration. A Wall Street Journal article in March of last year quoted the company saying it derives most of its revenue from medical evacuations and other emergency services that are spared from cuts. Although revenue from Afghanistan is expected to decrease after two years, Erickson expects its services will be diverted to the Middle East and Africa and that it will also see opportunities in commercial services such as heliskiing in Alaska.

The 2013 Year End Review and Forecast report last year from the Aerospace Industries Association (AIA) said the U.S. aerospace and defense industry is facing some of its greatest challenges in decades. While weathering numerous trials in 2013, the industry produced relatively flat results compared to 2012. Sequestration effects on the industry and Defense Department have forced industry layoffs and divestitures. Despite these pressures, overall aerospace exports held their upward trend, improving by $12.5 billion, displaying positive growth in both civil and military sectors.

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The report added that the industry could see some relief from sequestration over the next two years if the Bipartisan Budget Act of 2013 passes, but the impact of cuts will remain significant and continue in 2014 and beyond. While larger companies continue to weather the worsening budget environment by aggressively downsizing and re-organizing, smaller companies in the defense industrial base are not faring as well, as they face even more difficult challenges. The AIA expects 2014 to be a better year for aerospace. It forecasts growth in civil aircraft and the space sector to drive overall industry sales by 5.5%, to $232 billion next year.

According to analysts, apart from sequestration and spending cuts, some of the other challenges facing companies in the Aerospace and Defense sector include competition, changes in technology, macroeconomic conditions, and global policies impacting defense, civilian, and commercial aviation.

Erickson competes with several other heavy-lift helicopter operators in one or more of its markets. Erickson named Helicopter Transport Services, Siller Helicopters, and Columbia Helicopters (CHI) as its competitors in its annual report. Listed competitors include Bristow Group, Inc. (BRS), Era Group Inc. (ERA), PHI, Inc. (PHII) and Air Methods Corp. (AIRM)—not a direct competitor, as it’s an air medical transportation services provider. Larger companies in the defense and aerospace segment include General Dynamics Corp. (GD), Raytheon (RTN), Northrop Grumman (NOC), and Lockheed Martin (LMT). Defense stocks have rallied recently despite concerns about federal spending due to the recent Congress budget agreement and positive earnings outlook of the companies in the sector.

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