The Motley Fool: The Boring Portfolio

ANN ARBOR, Mich. (Feb.11, 1998) -- The S&P 500 and Nasdaq closed virtually unchanged Wednesday, with the S&P up one point and the Naz down a fraction.

The situation was a bit more exciting for the Boring Portfolio, however. It gained two-thirds of a percentage point in net value, with winning holdings outnumbering losers four to two. Our little bag o' stocks also pushed into the black for the year.

In any event, Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> delivered some big Borefolio news this morning. The company reported that it earned $0.41 per share on record revenues of $121 million. The EPS result easily topped analysts' consensus forecast of $0.35, as reported by First Call.

In the follow-up conference call, Atlas CFO Richard Shuyler announced with undisguised delight that the five flying lemons the company had leased from Federal Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> -- and that had caused no end of trouble this year -- have been returned to the lessor. Farewell, and grace Atlas's hangar no more!

In their place, Atlas has arranged for the early return of two of its Boeing 747-200s that were on lease to Philippine Airlines. Those aircraft are being reconfigured from passenger to cargo status and should enter service in the second quarter. In addition, Atlas's schedule for delivery of new 747-400 aircraft from Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> now appears to be relatively firm. Shuyler said he expects four new -400s will be delivered during the second and third quarters. Pilot training and preparations for the new aircraft have already begun.

Atlas's view of the marketplace is sufficiently positive that the company has reached agreement with Boeing to advance one of Atlas's remaining six 747-400s deliveries into late in the fourth quarter of this year. At year end, Atlas thus anticipates having a total of 24 aircraft in operation.

To pay for the five shiny new freighters, Atlas just completed the placement of approximately $539 million in, ahem, "Enhanced Equipment Trust Certificates," priced at a blended interest rate of approximately 7.5%.

As is the case for many companies in the capital-intensive airline industry, Atlas is now fairly highly leveraged. Long-term debt stands north of $700 million. As a relatively young business still in its high-growth phase, Atlas's management concluded that it was essential to seize the moment -- and the favorable financing opportunities -- to pump up the company's lift capacity.

In that regard, Shuyler said that Atlas's growth has been limited only by its capacity to take on new business, and not at all by demand. Atlas's customers flew their leased aircraft a record number of hours in the fourth quarter, and the expectation is for continuing strong demand for the balance of this year and beyond.

Shuyler said that Atlas saw no negative impact at all on the Asian cargo market last quarter. The current quarter also shows no sign of a slowdown, other than the normal seasonal pause and contracted customer cancellations that typically occur in connection with Chinese New Year.

Asian customers tell Atlas that the cargo market should remain strong as businesses there increase exports in order to attract hard currencies. All Atlas contracts are dollar-denominated (as they are in the air cargo industry generally) and are non-cancelable. Also, Atlas has only one aircraft under lease to a company in one of the financially weaker Asian countries: Thai Air.

Industry-wide, imports into Asia are showing some decline, Shuyler said. Atlas's situation is different from that of the small-package carriers, however, in that most of Atlas's flights into Asia carry either infrastructure materials needed for projects already under contract or raw materials and components flown into Asia for assembly and then shipped back out again -- such as in the electronics industry, for example.

Longer term, said Shuyler, as the weaker Asian airlines sell some of their current aircraft and defer delivery of new planes, that will create further capacity constraints in the global air cargo industry. As Atlas's fleet expands in 1998 and beyond, the company will thus enjoy an even greater share of total capacity.

In that regard, it's worth noting that of the 15 Boeing 747-400s on order globally, Atlas accounts for 10 of them.

Negotiations are going well regarding the placement of the 747-400 aircraft with customers, and Atlas anticipates making announcements of such placements within the next 60 days.

As for guidance, total block hours flown during the current quarter are expected to be within the range of 14,500 to 15,500. Block hours should to increase over the course of the year as additional aircraft come into service, with the Q4 total to reach approximately 26,000. Block hours for the full year are anticipated to total around 80,000. Longer term, the company anticipates block-hour growth in the 20% to 25% per year range. Currently, Atlas makes about $5400 per block hour in revenues.

In response to an analysts' question, Shuyler said that the company is comfortable with what he understood to be analysts' consensus EPS estimate of $2.01 for 1998.

I look at First Call and see $1.97 as the consensus forecast. But, hey, I'll take $2.01.

Oh yeah. Shares of Atlas soared $3 3/16, or $13%, to $27 1/2. Trading volume was five-times an average day's action.

TODAY'S NUMBERS

Stock  Change    Bid 
 ANDW  -  5/16  28.63 
 CGO   +3 3/16  27.50 
 BGP   +  1/8   32.63 
 CSL   -  1/2   49.00 
 CSCO  +  1/4   64.88 
 FCH   +  1/16  37.50

                   Day   Month    Year  History 
         BORING   +0.66%   3.88%   0.32%  26.23% 
         S&P:     +0.10%   4.05%   5.11%  64.09% 
         NASDAQ:  -0.03%   5.51%   8.80%  64.13% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     32.63   189.84% 
   8/13/96  200 Carlisle C    26.32     49.00    86.14% 
   6/26/96  150 Cisco Syst    35.93     64.88    80.54% 
    3/5/97  150 Atlas Air     23.06     27.50    19.26% 
   1/21/98  200 Andrew Cor    26.09     28.63     9.72% 
   11/6/97  200 FelCor Sui    37.59     37.50    -0.24% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13050.00  $8547.51 
   8/13/96  200 Carlisle C  5264.99   9800.00  $4535.01 
   6/26/96  150 Cisco Syst  5389.99   9731.25  $4341.26 
    3/5/97  150 Atlas Air   3458.74   4125.00   $666.26 
   1/21/98  200 Andrew Cor  5218.00   5725.00   $507.00 
  
   11/6/97  200 FelCor Sui  7518.00   7500.00   -$18.00 
  
                              CASH  $13182.97 
                             TOTAL  $63114.22