Buy Air Transport Services Group (NSDQ: ATSG)

Target: $33

Buy Up To: $26

Options Trade: Buy to open the March 16, 2018 call on Air Transport Services Group (ATSG) with a strike price of $25 at $1.35 or lower. Symbol (ATSG180316C25)

Rationale: We bought and sold Air Transport Service Group last year for a 60% gain. The stock is roughly at the same level we sold it at but earnings estimates have moved higher.

Air Transport buys narrow-bodied passenger planes, converts them to cargo planes and then leases and often operates these planes for delivery customers. The unique size of these planes makes them super efficient for landing in international and regional airports.

Amazon (NSDQ: AMZN) signed an agreement for 20 planes last year, which the company has delivered and operates. Last quarter Amazon represented 45% of Air Transport’s revenue. Amazon has been granted warrants to purchase up to 19.9% of Air Transport’s stock over the next five years.

Management is extremely bullish and has eight more aircraft purchased that are undergoing conversion. It has five more under consideration to purchase which would be put into service late 2018.

There is little doubt that the explosive growth in e-commerce will stop. One barrier to entry is the capacity of aircraft and delivery services to get those packages from retailers to consumers. I have been scouring the market for pure plays on this quandary and keep coming back to Air Transport as one of the best plays.

Earnings are expected to rise 31% in 2018 and 18% in 2019. The addition of new planes in service would boost the 2019 estimates. For now, my target is based on a conservative 24 P/E (price to earnings) multiple on 2019 estimates.