David Einhorn (Trades, Portfolio) is president of Greenlight Capital – a value-oriented investment adviser. He believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. He is a noted activist investor, taking positions in companies and then pushing management to implement changes.
Last quarter, Einhorn increased his stake in Aercap (AER, Financial) by buying 1,839,161 shares of the company. As of March 31, 2015, he was holding 5,581,800 shares of the company. The following chart shows his holding history in the company.
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.
AerCap 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. The company finished the 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.
Last year, the company purchased 33 aircraft 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 10have 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.
