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How to Invest in Emerging Market Travel Growth
Posted by: matsandalex (IP Logged)
Date: September 26, 2012 10:37AM
Warren Buffett is famous for saying that the airline business in the U.S. “has made no money” over the last 50-odd years. The industry has seen more bankruptcies than any other industry, yet investors still wager new capital. After Buffett made a horrific investment in US Air (LCC), he said that a "capitalist should have shot down the Wright Brothers during their historic 'first in flight' moment."
However, investors may have a winning investment in the airline industry if they focus on emerging markets.
Aircastle Limited (AYR) engages in the acquisition, lease and sale of high-utility commercial jet aircraft to passenger and cargo airlines worldwide. The company also makes investments in various aviation assets, including debt investments secured by commercial jet aircraft. The company has about 155 planes that it has leased to 65 lessees located in 36 countries.
For example, the company has financed nine planes to Hainan Airlines in China.
The basic business model is relatively simple. Aircastle borrows capital at about 5% and leases the planes out at approximately 14%.
From a valuation standpoint the company is downright cheap. The book value is $20.50 a share, compared to the current share quote at $11.59. If all the planes in the portfolio were liquidated you should still come out ahead.
One of the things most globe trotting investors have noticed over the last decade is how many more people are able to fly. The middle class has truly swelled. Now you have Paulistas hopping on Gol Airlines (GOL) for a beach vacation in Brazil, Indonesians and Thais traveling on Air Asia and Indians flying around on Kingfisher Airlines.
There is a near term catalyst on the horizon that could boost shares. In the past year, the company has repurchased 6.5 million shares. Subsequently, the share-count has shrunk by 9%. Following this repurchase, Aircastle will still have $21.5 million remaining on their buyback.
Investors wanting a low PE way to gain exposure to airlines in emerging markets should consider AYR.
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