Fortress Transportation: Improvement, But Uncertainty Remains

Fortress Transportation and Infrastructure Investors LLC (NASDAQ:FTAI) reported a good quarter on the revenue side, but it must be tempered with the fact it was working from a low baseline because of the world starting to open up from COVID-19 restrictions in the early part of 2021.

The question going forward is whether or not the major macro-headwinds are, for the most part over, or if a new set of troubling economic headwinds will derail the momentum the company is just starting to gather.

While there are a number of tailwinds that could allow the company to exceed expectations in 2023, the crucial catalyst to watch in whether or not consumers increase their traveling time in pursuit of experiences, or they cut back because of lack of disposable income, and go into survival mode by spending primarily on necessities.

In this article we’ll look at some of its recent numbers, what some of the potential tailwinds are over the next year or so, and what could frustrate its growth trajectory in 2023.

Latest numbers

Revenue in the third quarter was $230.37 million, up 69.43 percent year-over-year, beating analysts’ estimates by $111.97 million. Earnings per share in the reporting period was (-0.23), missing by $0.56.

Adjusted EBITDA came in at $108.9 million, up 25 percent from the $87.2 million in the same quarter of 2021, and down 24 percent from the $108.9 million in adjusted EBITA generated in the prior quarter. Concerning the balance sheet, FTAI has close to $70 million in cash at the end of the reporting period. By the end of 2022 the company expects to draw about $50 million on the revolver when taking into consideration asset sales and asset purchases; that leaves about $225 million remaining that is undrawn at the time of the earnings report.

By the end of the year expectations are, after asset sales and cash flows the draw and sales will be somewhat of a wash, suggesting the full draw, or very close to it, should be available heading into 2023.

As for its dividend, it was paid out for the 45th consecutive time, but with the caveat it shaved 10 percent off the prior amount, paying out $0.30 per share.

Breaking down adjusted EBITDA

With management saying the “key metric” is adjusted EBITDA, it’s worth taking a closer look at the results, break them down, and take note of the reason it fell in the quarter.

The leasing business of FTAI accounted for $96 million in EBITDA in Q3, with the “pure leasing component” of that coming in at $75 million, dropping from $87 million sequentially. The major reason for the drop in EBITDA came from the sale of about $145 million in book value of asset in the second and third quarter in relationship to its cargo campaign sales, which included 30 engines and 5 aircraft.

Including new acquisitions and strong demand for assets, management believes Q4 will improve on those numbers. For 2023, the company guided for leasing EBITDA to come in at a range of $350 million to $400 million, not including gains coming from asset sales. In regard to assets sales in Q3, the company sold $64.9 million in book value, accounting for a gain of $20.6 million. For full-year 2023, the company says it’s confident it’ll be able to have assets sales of about $25 million per quarter, or $100 million. Aerospace contributed $19 million to EBITDA for the third quarter. Excluding PMA contributions, the company had $70 million of EBITDA in the last four quarters. In full-year 2023 the company guides for quarterly EBITDA in its Aerospace segment to come close to the performance of its leasing unit, with expectation of a quarterly EBITDA in a range of $20 million to $30 million, or about $100 million or more for the year.

Confidence in those numbers come from the growing backlog in its aerospace business in relationship to “other leasing companies, MROs, or maintenance repair organizations and airlines.” Looking ahead to Q4, FTAI has started closing on $200 million in assets, and signed letters of intent to acquire another $300 million in new assets in the same quarter. Taking into account leasing EBITDA from the deals and subtracting what it gives up from the sales, management estimate an increase in sales by about $40 million, or approximately $10 million in adjusted EBITDA per quarter. Also significant is with two of the deals the company kept the engine services contract, which is expected to add another $10 million in adjusted EBITDA annually for the duration of the leases, which have about 8 years remaining on them.

A look at share price movement

FTAI has had an interesting 5 years with its share price movement, with the company trading today almost at the same price it was in July of 2015, when it was trading at a little under $17 per share. That’s about where it was trading when the collapse from the pandemic hit the market in March 2020.

After plunging to almost $3.00 per share in March 2020, it began a strong recovery to over $28 per share in July 2021, before plunging to where it’s trading today at a little over $17.00 per share.

The point is management believes the headwinds it faced over the last 3 years or so are largely abated, and now has the wind at its back. Among the positive catalysts are double-digit increases in the price of parts, airlines looking for ways to cut costs associated with costly full engine restorations, and the delays in the delivery of new aircraft has brought about a “scarcity of 737NGs and A320 COs” which will accelerate significant demand for 737NGs, A320 COs and CFM56 engines for a long time into the future. Last, travel demand has returned to levels that are approaching pre-COVID-19 levels. Looking at its share price movement over the last year, these potentially positive catalysts will have to come together in order to give it a sustainable boost. To me, airline travel demand will be key contributor there, and if demand fails to hold in increasing economic weakness, the positive narrative for FTAI could collapse.

Recession, inflation and interest rates

By the definition of a recession used over the last 70 years, we are already in one. The only question now is whether it’s going to be a deep and prolonged recession, or a mild, short-term one.

In my research it seems there are more analysts and investors that think the recession is going to be longer and deeper than expected. That said, we really have no idea. There are a lot of moving parts of the economy, and outside forces like the Federal Reserve and other central banks will have an effect on how it all plays out.

The next couple of CPI readings will be crucial in my opinion on how investors view the global economic future over the next year or so. If it’s bearish, the stock market will take another big hit, and FTAI will participate in that in that downward spiral, as there is no doubt consumers will tighten up their wallets if things get worse. Under that scenario, I think the idea of travel remaining one of the few growth sectors in 2023 will start to decline. On the other hand, if CPI comes down and the Fed turns a little more dovish and appears ready to pivot, it would be a positive catalyst for the market, and the share price of FTAI would take off under that scenario, with anticipated increase in traveling demand filtering to the top and bottom lines of the company.

Conclusion

Even though Q3 had a nice boost in revenue year-over-year, it was primarily because of the weak comps it was working from in 2021 when the global economy started to reopen again.

I don’t think that momentum is going to totally go away even if the economy remains weak and inflation remains stubborn, but it will slow down. With scarcity of new aircraft and companies looking for alternatives, it plays into the business model of FTAI, which can offer lower cost engines to customers, along with maintenance-related parts.

I’m not as positive on the performance of the company going forward as management is because I don’t believe the macro-headwinds are necessarily over at this time. They could be, but first we need to see the inflation numbers and the Fed’s response to it before being confident in the growth prospects of FTAI over the next couple of years.

The company does offer a decent entry point at this time with the clarity and visibility we have, but that could quickly go south if inflation remains stubbornly high. For that reason, I think it’s best to take a wait-and-see attitude toward the stock until confirmation the worst is over.