AerCap Holdings (AER, Financial) is engaged in the business of leasing, financing, selling and managing commercial aircraft and engines primarily in the United States and Russia. For YTD15, the stock has surged higher by 16%, and the rally looks good to sustain through the year. This article discusses the key factors to be bullish on AerCap Holdings in the near-term as well as in the long-term.
The first reason to be bullish on AerCap Holdings is the company’s strong aircraft fleet and revenue visibility from the fleet. As of December 2014, AerCap Holdings had a fleet of 1,132 owned aircraft with an average age of 7.7 years. The important point here is that the company’s aircraft have an average remaining lease term of 5.7 years, and this ensures that the revenue and cash inflow remains steady not only in 2015 but for the next five years.
As a result of the revenue visibility through lease contracts, the company’s revenue outlook for 2015 is in the range of $5-$5.1 billion with an estimated net profit of $1.05-$1.10 billion. This clear revenue visibility implies that the company will have strong quarters in 2015 and this is likely to take the stock higher.
The aircraft leasing industry generally has companies that have high leverage and all aircraft purchase is done through debt funding. AerCap Holdings has nearly $3.2 billion in capital expenditure in 2015 along with $3.6 billion in debt maturities. It is therefore important to discuss the company’s financial position and liquidity position for the coming year.
As of December 2014, AerCap Holdings had a cash position of $1.5 billion and the company also had an undrawn revolving credit facility of $5.8 billion. This translates into a total liquidity cushion of $7.3 billion that is sufficient to take care of the capital expenditure and debt maturity.
However, AerCap Holdings also expects nearly $3.4 billion in operating cash flow in FY15 and the implication is that the company’s capital expenditure for FY15 can be solely funded through internal cash flows. Therefore, even with high levels of investments, the company’s financial position will remain comfortable through 2015.
Another important point from a long-term growth perspective is that AerCap Holdings has 380 aircraft on order for delivery over the next few years. All the aircraft that are scheduled for delivery on and after 2015 will be next generation aircraft and this will attract long-term lease as these aircraft are modern and more fuel efficient. Just as an example, the average lease term for new aircraft in FY14 was 144 months while the average lease term for used aircraft was just 54 months. As more new aircraft are introduced in the fleet, the average lease term will increase, providing stronger revenue visibility.
As a part of the company’s strategy to turn towards a modern fleet, the company has sold over 100 aircraft since December 2013, valued at over $2 billion. In FY13, AerCap Holdings had a pre-tax gain from aircraft sale of $41.9 million, and the gains for FY14 were $37.5 million. I expect the selling of older aircraft to continue in 2015, and this will provide a positive boost to the overall weighted average fleet age.
Therefore, considering the factors of strong revenue visibility, stable cash flow visibility and a strong growth pipeline through new aircraft, AerCap Holdings is an attractive investment to consider at current levels. After 4Q14 results, the stock has been trending higher on positive sentiments and outlook for 2015 and I believe that this positive sentiment will sustain for the stock in the coming quarters. I therefore recommend the stock with a medium to long-term investment horizon and fresh exposure can be considered at current levels.
