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David Abrams’ New 13G Filing

Last month, Abrams Capital Management, a $1.1 billionhedgefund managed by David Abrams, increased its total holdings of Wesco Aircraft Holdings (WAIR) to 4.5 million shares. The fund now owns 5.2% of the company, along with significant holdings of Lamar Advertising (LAMR), H&R Block (HRB), and SLM (SLM). Why has Abrams Capital increased its total ownership of Wesco to 4.5 million shares from 34,800 (as reported on March 31)?

David Abrams

Wesco Aircraft is considered one of the largest suppliers and distributors of aircraft parts in the world, managing a large stretch of the global supply chain. James Crichton and Adam Weiss, managers of ScoutCapitalManagement, also have a 3.7 million share stake in the company.

A glance at Wesco’s insider transactions is quite revealing. There have been no major purchases by higher-ups over the past year, though there have been some interesting sales. A cohort of seven different directors and executives sold shares in early August 2011 at a price of $14.14, directly before the strong price dips of early October. In October 2011, Wesco shares dipped to about $9–but insiders didn’t sell then. Alex Murray, VP of Global Operations at Wesco, waited until the storm cleared to sell some shares at $14.63. When insiders sell a stock at a certain price, we may start to speculate that the sale price of their shares might correlate with their appraisal of the company’s value.

Thus, when Wesco shares fell under $13 in June (where they are presently), Abrams likely saw this as an entry point. Generally speaking, Abrams’ move makes sense in a broader subsector context. The aeronautics industry is in a cyclical upswing. The total amount of passenger air traffic increased by 6.9% in 2011, and as airlines return to strong profitability, there will be a long-term demand for new aircraft as older fleets become increasingly inefficient to run. Though the U.S. Congress enacted a $487 billion defense budget cut over the next 10 years, there is still a strong demand for air travel as broader economic factors improve and as newer technology becomes available.

Furthermore, Wesco management claims that the present rate of part orders for its company in particular is not indicative of real demand for new aircraft. So there might be an acceleration of earnings growth for the company, which experienced a 6% decrease in year-over-year earnings per share in 2011 despite the recovering airline industry, evidence for a lag. The company expects an earnings of around $0.90 per share for 2012, an 11% increase year-over-year. Additionally, sales are presently increasing at about 7% annually, a figure that ought to grow larger given the present data.

Wesco Aircraft relies on the big-wigs in the aircraft manufacturing industry. Boeing (BA) projects revenue in 2012 of around $80 billion, which is a 16% year-over-year increase. Unlike Lockheed Martin (LMT), which receives 80% of its revenue from U.S. government contracts, Boeing has less direct exposure to the recent Congressional budgetary actions. Indeed, Chieftain Capital and Elm Ridge Capital both lowered their holdings of Lockheed Martin by 16% and 33%, respectively (Youcanseethishedgefundactivityhere). Wesco Aircraft will do well since it maintains a diversified docket of relationships with major original equipment manufacturers (OEMs) that are not narrowly exposed to Department of Defense contracts, including Boeing, Airbus, and Embraer (ERJ).

Wesco Aircraft is a major supplier of fastener hardware to OEMs. On May 24, the company acquired Interfast, Inc., for CAD $134 million. Management believes that this will help it broaden its market share in North America as it competes with other focused companies like Alliant Techsystems (ATK). Like Alliant Techsystems, Wesco is well exposed to the broader aeronautics industry. The recent move to acquire Interfast will help Wesco Aircraft maintain a diverse product offering in a market that is shifting away from defense contracts and towards commercial purchasing.

David Abrams–who earned his B.A. in history from the University of Pennsylvania and is a board member for Berklee College of Music, Crown Castle (CCI), and CC Media Holdings–has thus increased his fund’s weight in the aerospace subsector. Not only that, he is playing an Interfast acquisition that will give Wesco Aircraft momentum in the higher-tech areas of its business. With an eye at recent insider activity, we think that a portfolio overweight in Wesco Aircraft is an intriguing investment idea with its present valuation prospects.

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