We have all seen it. Firefighters risking their lives fighting a wild fire somewhere out west. Out of the sky a helicopter drops tons of water directly onto the fire decimating the blaze. Saving lives and thousands of homes. How about owning a company that is essential to fighting these wild fires?
Erickson Air-Crane Inc (NASDAQ: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. Erickson hit a 52 week high of $29.42 back on May 6, 2013 and since has pulled back over 14%. This pull back presents a great entry point to purchase a few shares of this great company.
Seeing that Erickson Air-Crane Inc (NASDAQ:EAC) manufactures aircrafts can been a little off-putting. There a few great companies already in this space that also look undervalued. Think of a company like Textron Inc. (NYSE:TXT). Textron, whose market cap of 12.24 billion is 50 times greater than that of Erickson’s, is the parent company for Bell Helicopters. Textron trades at just 11.31 time’s forward earnings and at just 0.29 time’s sales. Textron also has a dividend, which Erickson does not, of 0.30%.Textron also maneuvered through sequestration relatively unscathed and its Bell Helicopter subsidiary has won over $200 million in US Government contracts in the last two weeks alone. These contracts include Bell Helicopter equipping and supporting Iraq and Taiwan as well as manufacturing MV-22 Tiltrotar Osprey for the US Navy through 2016.
Or how about United Technologies Corporation (NYSE:UTX) who is the parent company of Sikorsky Helicopter. United Technologies also looks to be undervalued as it trades at just 13.76 times forward earnings with PEG ratio of just 1.16. The company also has a 2.2% dividend yield with a payout ratio of just 40% and grew earnings last quarter 284% year-over-year. Similar to Textron Inc. (NYSE:TXT), United Technologies’ helicopter subsidiary has been winning significant government contracts. On May 29, 2013 Sikorsky Helicopter won a $453 million award from the Pentagon to supply the Naval Air Systems Command with 4 CH-53K Super Stallion heavy lift helicopter by 2017, locking in significant revenue for years to come. United Technologies is also expecting to grow at over 13% each year for the next 5 years despite the looming cut backs in US government defense spending.
Although Textron Inc. (NYSE:TXT) and United Technologies Corporation (NYSE:UTX) both manufacture helicopters, they are not Erickson Air-Crane Inc (NASDAQ:EAC)’s direct competitors. Not even close. See Textron and United Technologies are both huge defense contractors (together the two have revenue over $10 billion from the US government; primarily the Department of Defense) while Erickson Air-Crane actually does no work for the DoD. In fact, they generate a small portion of their revenue from the manufacturing division. For FY 2012, Erickson generated just $16 million of its $180 million in annual revenue from its manufacturing segment. All of this revenue is from maintenance and remanufacturing, not actual production. The area where Erickson truly distinguishes itself is Aerial Services.
Erickson Air-Crane Inc (NASDAQ:EAC) owns and operates a fleet of 18 Aircranes, which they use to support a wide variety of government and commercial customers worldwide across a broad range of aerial services, including firefighting, timber harvesting, infrastructure construction, and crewing. Aerial services accounted for 89% of Erickson’s consolidated revenues in 2012 (51% firefighting, 20% timber harvesting, 17% construction, and 12% crewing).
The company is also heavily growing this segment through acquisition. In March of 2013, Erickson Air-Crane Inc (NASDAQ:EAC)entered into agreements to acquire Air Amazonia from Brazilian oil and gas exploration company HRT for $75 million and Evergreen Helicopters for $250 million. After the acquisitions Erickson will operate over 100 rotary wing aircraft and over a dozen fixed wing aircraft. According to Erickson CEO Udo Rieder, the acquisitions will move Erickson from operating exclusively in the heavy-lift segment (construction, logging and firefighting) into the “global aviation services” market which is much more diversified, in terms of customer segment and location.
From a fundamental perspective, Erickson Air-Crane Inc (NASDAQ:EAC) meets many of the criteria I typical look for. This is a growth company trading at just 10.31 time’s forward earnings. The company also has a free cash flow yield over 14%. Erickson also has close to 60% of its outstanding shares owned by insiders. This shows that management is extremely invested in the well-being of the company and that they are going to be dedicated to the financial well-being of the business.