By Philip van Doorn, MarketWatch
Many investors have shied away from Amazon.com’s stock for years because of very high valuations — and have missed out on tremendous long-term gains.
But there are other ways to profit from that success, including by investing in two companies that supply Amazon /zigman2/quotes/210331248/composite AMZN -1.79% yet trade at much lower valuations and are expected to increase sales and earnings more rapidly than Amazon this year.
The two are Air Transport Services Group /zigman2/quotes/202631986/composite ATSG -0.59% and Kornit Digital /zigman2/quotes/201434077/composite KRNT +1.52% , which are favorites of Craig Richard and Doug Cartwright, who co-manage the Buffalo Emerging Opportunities Fund /zigman2/quotes/207405466/realtime BUFOX -0.16% . The fund was recently upgraded to a four-star rating (out of five) by Morningstar, after ending 2018 with a three-star rating. The fund managers discussed the stocks in an interview on Feb. 5.
Before looking more closely at the fund and its strategies, here are some numbers for the three companies:
|Company||Forward P/E||Est. sales increase - 2019||Est. sales increase - 2020||Est. EPS growth - 2019||Est. EPS growth - 2020|
|Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN||61.2||18%||18%||35%||43%|
|Air Transport Services Group /zigman2/quotes/202631986/composite ATSG||15.3||46%||11%||32%||12%|
|Kornit Digital /zigman2/quotes/201434077/composite KRNT||34.8||24%||26%||57%||59%|
Amazon trades at a high multiple to the consensus earnings estimate for the next 12 months among analysts polled by FactSet. The other two companies trade at much lower multiples and are expected to grow more quickly than Amazon this year. Looking at 2020 estimates, Air Transport Services Group is expected to grow more slowly than Amazon, but Kornit Digital is expected continue posting the fastest sales and earnings growth among the three.
Both of the smaller companies rely heavily on Amazon, which holds warrants to purchase shares of both. Only seven analysts cover each of the two companies.
Air Transport Services Group
Air Transport Services Group /zigman2/quotes/202631986/composite ATSG -0.59% purchases used Boeing 737, 757 and 767 airplanes, refurbishes them for freight transport and then leases them to other companies. The company, which has a stock-market value of about $1.4 billion, announced in December that it had expanded its relationship with Amazon /zigman2/quotes/210331248/composite AMZN -1.79% to lease and operate 10 additional 767s, while extending agreements for the 20 767s Amazon was already leasing.
Air Transport Services supplies crews for the planes and handles maintenance, insurance and the warehousing of the Amazon products it transports. Amazon pays for the fuel.
“As it moves away from FedEx /zigman2/quotes/203047719/composite FDX -0.53% and the U.S. Postal Service, Amazon will look to outsource transportation through ATSG and its competitor Atlas Worldwide /zigman2/quotes/200338181/composite AAWW +0.19% , while not owning the planes because of the high capital outlay. Amazon is looking potentially to deliver packages for other parties as well,” Cartwright said.
Kornitzer Capital Management
He estimated that more than half of Air Transport Services Group’s revenue would come from Amazon once the new planes are deployed, and another 25% of revenue from DHL (a unit of Deutsche Post AG /zigman2/quotes/202951856/delayed XE:DPW -0.40% ).
As part of the new agreement, Amazon was granted additional warrants that give it the right to purchase 39.9% of ATSG’s common shares, rather than 33.2% under the previous deal.
Since Dec. 20 (the day before the new Amazon deal was announced), ATSG’s shares have surged 33% through Feb. 5. This means the market value of Amazon’s warrants has risen as well, which “reduces Amazon’s overall cost of doing business with ATSG,” Cartwright said.
Amazon has a similar deal (including warrants) in place with Atlas Worldwide. However, Cartwright said he and Richard steered clear of Atlas because “the balance sheet is materially worse” than that of Air Transport Services Group. “ATSG’s debt is about 1.5 times Ebitda for 2019, while Atlas’s is just under 4,” he said.