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Air Lease (AL): 2019 Top Picks' Mid-Year Update

07/10/2019 5:00 am EST


Douglas Gerlach

President, ICLUBcentral, Inc.

Doug Gerlach, editor of Investor Advisory Service, selected Air Lease (AL) as his favorite investment idea for 2019. The stock has since risen 37%. Here's his latest update on the airline leasing firm.

Since its founding in 2010, airplane leasing company Air Lease has been consistently profitable, achieving a reputation for executing at a high level. But many on Wall Street don’t seem to fully understand the company and its business and thus bestow company, industry, and economic headwinds with exaggerated levels of strength.

For example, some expect that rising interest rates could affect Air Lease, but its cost of capital is among the lowest in the industry and its lease agreements have interest rate riders that increase lease payments when rates go up. What about problems with Boeing 737-Max planes? These aircraft make up just 5% of its current fleet and 5% of its order book, so the potential effect on Air Lease is isolated.

In mid-2018, Air Lease entered into what it called the fastest 18-month period of growth of its history, and we calculated long-term growth to be likely 14% for sales and 16% for EPS. Still, by year-end 2018, the stock was down more than a third from its 2018 high.

Over the next two quarters it reported, Air Lease demonstrated how it can perform in the face of adverse conditions. Despite significant headwinds, fundamentals improved and the share price grew accordingly.

In its fourth quarter 2018 report, sales grew 13% and EPS grew an adjusted 26% over 4Q 2017.

But the really interesting part of the story is that the company reported that it expects to take delivery of 80 new planes worth $6.5 billion in 2019, all of them placed with customers under long-term leases. It will also sell $1 billion of aircraft. This represents a 30% net increase in its leasing book.

Air Lease management says lease rates are stable and demand remains high. Leases have already been signed on 91% of its expected deliveries through 2020 and 72% through 2021.

For the first quarter of 2019, Air Lease pre-announced that EPS would rise 23% on a 22% revenue increase. Airbus and Boeing production delays caused the company to take delivery of just 11 aircraft in the quarter, eight fewer than expected.

It sold six planes, four to investment funds it manages (and receives fees for managing) for institutional investors. Capital spending for 2019 is now expected to be reduced to $5.8 billion in new aircraft, down from previous expectations of $6.5 billion.

Given the uncertainties surrounding the Boeing 737-Max 8 and continued production problems at Airbus, we believe there is risk even to this reduced capital spending plan.

Two silver linings from these delays: lease rates are being pushed up and airlines are looking to extend existing leases. 2019 should still be a year of considerable growth for Air Lease, and we see it as a buy up to $51.

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