Air Lease (AL) is a perennially cheap stock despite an incredible management team and a history of steady growth, explains growth stock expert Doug Gerlach, editor of Investor Advisory Service.
Air Lease Corp. was formed in February, 2010 by Steven Udvar-Házy, the man who created industry-giant International Lease Finance Corp. (ILFC) 45 years ago. We believe that Udvar-Házy understands the aircraft leasing industry better than anyone else.
Right behind him is John Plueger, ILFC’s former Chief Operating Officer. Udvar-Házy is Executive Chairman of Air Lease and Plueger is its Chief Executive Officer. Nine of Air Lease’s ten executives come from ILFC. The entire company has about 90 employees.
Aircraft leasing companies buy planes, then lease them out to airlines around the world. Why would airlines lease rather than buy? It’s about return on capital, the desire to maintain a good balance sheet, and access to aircraft which must be ordered years in advance.
Just 5% of Air Lease’s planes (measured by book value) are in the U.S. and Canada. About 44% are in Asia/Pacific (18% in China), 31% in Europe, 7% in Latin America, and 13% in the Middle East and Africa. Air Lease customers include Southwest Airlines, United Airlines, British Airways, KLM, and Korean Air.
As of June 30, Air Lease owned 115 Airbus planes and 155 Boeing aircraft. The company has orders for 391 additional aircraft. Included in its order book are 109 planes scheduled for delivery before the end of 2019.
There are a number of risks faced by aircraft lessors. One is the risk that off-lease aircraft lose much of their residual value. And with high debt levels, aircraft lessors also face considerable interest rate risk. There is also the risk of aircraft accidents or financial difficulties of a particular airline.
Meanwhile, a rising global middle class should continue to drive demand for air travel, which has been rising 6%-7% a year. Fuel savings, noise restrictions, and comfort should also become factors pushing for modernization of airline fleets. We believe that Air Lease is the best positioned lessor with the newest fleet, the lowest overhead, the lowest cost of funds in the industry, and the best management team.
Based on its order book and aircraft sales plans, we believe that Air Lease can grow its sales by 14% and profits by 16% annually over the next five years, resulting in EPS as high as $8.70. If a high P/E of 12 applies, the stock price could approach 105.
Note that its P/E ratio has been declining. The growth and value are so compelling that the stock offers good upside even if our projections turn out to be too optimistic. The potential annual return is almost 24% including a modest 0.9% dividend yield.
