Wednesday, July 2, 1997

Airborne Freight Corp.
(NYSE: ABF)
http://www.airborne-express.com
Phone: 205-285-4800
Price (7/2/97): $42 7/8

HOW DID IT DOUBLE?

Airborne Freight took wing starting in October of 1996. The stock had steadily declined during the first 10 months of the year. Strong competition and a difficult pricing environment had grounded profit growth. Then some good things started to happen.

The management of Airborne decided in late 1996 to eliminate low margin business from its domestic operations. This move led to an increase in revenue per shipment by 2.6%, most of which moved directly to the bottom line.

A second good thing was the decision by industry leader Federal Express to raise rates for its top corporate clients. This permitted pricing flexibility throughout the overnight package industry and has allowed Airborne to raise rates, which in turn enhances profitability. Eventually analysts took note, raising earnings estimates for the current fiscal year from $1.60 per share at the end of 1996 to $2.63 per share currently.

Better margins, improved pricing, and analyst upgrades caught investors' attention and the stock took off.

BUSINESS DESCRIPTION

Airborne Freight Corp. operates an overnight package delivery service under the brand name Airborne Express. It is the third largest overnight service in the U.S. behind Federal Express and UPS. Airfreight operations are primarily domestic, but the company also operates in over 200 foreign markets. The company also operates its own airline and owns an airport in Wilmington, Ohio, at the site of an old military airbase.

FINANCIAL FACTS

Income Statement

      12-month sales: $2541.9 million
      12-month income: $40.5 million
      12-month EPS: $1.89
      Profit Margin: 1.6%
      Market Cap: $922.97 million

      Balance Sheet
      Cash: $10.7 million
      Current Assets: $390.2 million
      Current Liabilities: $275.4 million
      Long-term Debt: $366.4 million

      Ratios
      Price-to-earnings: 22.7
      Price-to-sales: 0.36

HOW COULD YOU HAVE FOUND THIS DOUBLE?

This double wasn't easy to find. If an investor had looked at Zack's or First Call last fall, there would have been no hint of things to come. The company actually traded at a YPEG greater than its current price using earnings estimates at that time, and it had missed estimates badly in the fall quarter.

However, if an investor knew the industry and anticipated the impact of a more liberal pricing environment, there could have been an opportunity. Given the company's low profit margin of 1.6%, any price increase could add greatly to the bottom line. Judging the company by looking at past performance wouldn't have been a good guide to current earnings potential given the favorable pricing environment. A glance at the performance of Federal Express stock could have given an indication that some good things were happening in the industry

WHERE TO FROM HERE?

Looking at earnings estimates from First Call, the stock looks a bit rich. The updated earnings forecast for fiscal year 1998 is $2.87 per share and long-term growth is estimated at a modest 10%. That implies a fair value of around $29.

But wait. The analysts have really blown this story. Companies with rapid changes in profitability like Airborne often leave analysts struggling to catch up to the earnings growth. Such was the case with Airborne. The company beat estimates by a whopping 97% last quarter. Earnings estimates have almost doubled in six months, and Value Line ranks the stock #1 for timeliness. So there are dissenting views. As for this Fool, it looks like investors who buy a ticket on Airborne may have been left at the gate -- this plane is nearing cruising altitude.

-Mark Weaver, MD (MWEAV@aol.com)

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