Breaking Down Cohodes Seemingly Best Arguement
Cohodes has an updated report (out today) that can be found here: https://maydayeifdividend.com/wp-content/uploads/2017/07/EIF-Q2-2017.pdf
In particular, I want to focus on pages 7 and 8.
In a nutshel, he's arguing that if a majority of Regional 1's revenue is part's sales, which it sources from planes that it's bought, then the capex that they classify as "growth capex' should realy be considered as inventory, or changes in working capital, because once that part is sold, it can't be sold again.
Ths is the first time his capex arguement has actually made some sense, the problem is, it's still wrong and I'll expain why below.
On page 7 of his report, he highlights a company called AeroTurbine that does something simular to a part of R1's business, they buy planes with the intent to strip them and sell for parts, except they consider the planes they buy as inventory not growth capex. Then on Page 8 of his report he highlights EIF MD&A where it says they consider the planes they buy as growth capex with the contextual hint that it should be inventory given that big chunk of R1 revenues are parts. HOWEVER, even in his own highlight, he fails to realize that the line he's highlighted has the words OPERATING AIRCRAFT where the intended use is not to strip but lease the asset out - this is the textbook definition of GROWTH CAPEX.
Furthermore, if he actually read the Q2 MD&A the paragraph below the one he highlighted, the company clarifies this even further (which of course Cohodes coveniently leaves out):"Purchases of inventory are not reflected in either growth or maintenance capital expenditures. Aircraft purchased for part out or re-sale are recorded as inventory and are not capital expenditures."
Lastly, his claim that since the majority of R1's revenue is part's sales (which supposedly reflects the proportional use of capital of the business), any capital allocated to R1 should therefore default to inventory is also incorrect if you actually think it through.
For example: If i bought 3 planes, 2 for lease and one for parts (and i sold the parts in the same quarter for simplicity), do you really think my revenue spit would be 66% lease 33% parts? - ie. how I'm employing the capital? No, I'd have a much higher weight to parts sales becaues aircraft are very capital intensive and any person involved in aviation would understand that.