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Will Boeing's Woes Clip the Wings of Air Lease?
09/05/2019 5:00 am EST
It is presently being held back by global growth worries and delivery delays throughout the industry, most acutely the grounded 737 MAX 8 manufactured by Boeing (BA).
Air Lease Corp. was formed in February, 2010 by Steven Udvar-Házy, the man who created industry-giant International Lease Finance Corp. in the early 1970s. We believe that Udvar-Házy understands the aircraft leasing industry better than anyone else.
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. Air Lease frequently says, “In bad times carriers need our balance sheet. In good times, they need our delivery slots.”
Just 5% of Air Lease’s planes (measured by book value) are in the U.S. and Canada. About 46% are in Asia/Pacific (17% in China), 29% in Europe, 7% in Latin America, and 13% in the Middle East and Africa. As of June 30, Air Lease owned 134 Airbus planes and 162 Boeing aircraft.
The company has orders for 343 additional aircraft. About 97% of planes scheduled for delivery through 2020 have been placed under long-term leases with customers.
A clause in the lease document protects Air Lease with an interest adjustment factor in case interest rates rise before delivery is taken. One hidden benefit of falling interest rates of late is that its lease contracts don’t require a reduction in lease rates if interest rates decline.
A rising global middle class should continue to drive demand for air travel, which has been rising 5%-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 $10.27. If the high P/E of 12.6 applies, the stock price could reach 129. 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 exceeds 27% including a modest 1.3% dividend yield. We see a downside risk of 28% to 28, its low price from the December 2018 market selloff.
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