AerCap (AER, Financial) recently reported strong results with both revenue and EPS beating analyst estimates. While the company’s EPS of $1.44 was better than analyst estimates by 17 cents, its revenues were ahead of consensus estimates by $20 mn. Commenting on the results, the company’s CEO Aengus Kelly said,
"AerCap reported another record quarter with over $300 million of adjusted net income. With 104 aircraft transactions executed, our first quarter results reflect the attractiveness of our aircraft portfolio, the diversity of our global customer base, and the resilience of the industry fundamentals of aircraft leasing. Further, throughout the quarter, we continued to access attractive capital as shown by our execution of $1.6 billion of capital markets initiatives. Finally, our deleveraging continues ahead of plan, ending the quarter with a debt/equity ratio of 3.2 to 1.
Going forward, we continue to see strong demand globally for our aircraft, as evidenced by the 99% utilization rate. Our platform executes an aircraft transaction every 24 hours and our order book remains one of the most attractive in the industry. The combination of our global platform, experienced management team along with the long dated nature of our lease cash flows and liability structure will drive attractive returns for our shareholders. To that end, we will continue to allocate capital to maximize long term shareholder value."
AerCap's business is providing aircraft to customers in major geographical regions. The company was incorporated in 2006. In December 2013, the company entered into a definitive agreement with American International Group (AIG) to acquire 100% of the common stock of ILFC, a wholly owned subsidiary of AIG. This acquisition helped the company become an industry leader with a more diversified customer base and wider geographic coverage.
The company finished first quarter with $44.1 billion of total assets on balance sheet. Its net spread, a crucial measure of the company's performance, was $877.9 million in the first quarter, a 396% increase from Q1 of 2014.
During last year, the company purchased 33 aircrafts with a total value of $2.3 billion. It has future commitment for aircraft purchases of $28 billion between now and the end of 2022. These aircraft consist of the most modern, fuel efficient aircraft available in the market. The demand for these aircraft remains robust, and the company has now placed either under lease contract or letter of intent more than 90% of its committed aircraft purchases through December 2017 and more than 60% through 2019. During the last four months alone, the company signed lease agreements of 49 Airbus A320 NEO and A350 aircraft. These placements are for an average term of 144 months and represent 13% of the company's order book. These placements demonstrate both the scale of the AerCap platform and the continued demand for modern, fuel efficient aircraft, which taken together underpin the future profits and cash flows of the AerCap franchise.
The company also made substantial progress in deleveraging its balance sheet during the last quarter and ended the quarter with an adjusted debt equity ratio of 3.2 to 1. The company expects to reach a 3-to-1 debt equity ratio during 2015 and expects to maintain a debt-to-equity ratio in a range of 2.7 to 3 over the next several years.
In addition to robust demand environment, the company is also benefiting from its ILFC acquisition. This deal helped AerCap become an industry leader with a more diversified customer base and wider geographical coverage. The integration of this deal is progressing well ahead of schedule in all material aspects.
Going forward, management expects robust traffic growth for 2015 and a resulting increase in demand for aircraft. The recent reduction in fuel cost has provided a meaningful and immediate benefit for the company's customer base, thereby improving its credit quality and increasing demand for capacity. The company has guided for an annual EPS run rate of over $5 per share which is significantly higher than its original guidance which it provided at the time of ILFC transaction.
In addition to improved profitability and cash flows, the company is now close to its ideal debt-to-equity ratio (2.7 to 3) which it intends to maintain over the long term. This means the company now has excess capital which can be used for air craft purchases and/or return of capital through dividends/share repurchases. According to management projection, the excess capital available to the company from 2015 to 2017 will be ~$1.3 billion. If this entire amount will be used for aircraft purchases, it would result in average growth rate of ~9% per annum in the company's leased assets through 2017. On the other hand, if the company uses this entire amount to buy back shares, it will reduce the float by 30 million shares. Going forward, we can expect a prudent mix of air craft purchases and share buybacks which will act as a positive catalyst for the shares.
AerCap is trading at 8.62 times 2015 EPS. Its EPS is expected to grow 5.97% this year and 6.80% next year. Analyst sentiments are overly bullish on the company. Out of 13 analysts covering the company ten have buy ratings, two have hold ratings and only one has a sell rating. I like the company given its low valuations and good growth prospects.
