The air leasing industry has witnessed bullish momentum as airline companies increasingly prefer leasing over ownership of aircraft. Among the companies in the leasing industry, Air Lease (AL, Financial) has been my personal favorite, and the stock has not disappointed. With a deep pipeline of aircraft deliveries, I maintain my bullish view on Air Lease.
But this article will discuss another aircraft leasing stock that has seen bullish momentum in fiscal 2017 and is likely to trend higher in the coming years as well. AerCap Holdings (AER, Financial)Ă‚ trades at $52.9; the stock has moved higher by 27% year to date.
Strong financial health
When discussing the aircraft leasing industry, the first point on which to elaborate is the company’s fundamentals. Growth in the leasing industry is largely backed by leverage and therefore the balance sheet aspect is important.
For AerCap Holdings, I see the following positives from a financial perspective:
- The company has $3.7 billion in undrawn credit facility as of June 30. Further, another $3.7 billion is available under other facilities and contracted sales. This takes the total liquidity buffer to $7.4 billion.
- AerCap Holdings has $1.6 billion in unrestricted cash as of June 30, and this adds to the liquidity buffer.
- For the next 12 months, AerCap Holdings expects operating cash flow of $3.2 billion and this will be potentially used for new aircraft purchase.
Overall, the company’s total liquidity buffer is $12 billion for the next 12 months.
It is also important to mention that as of June 30, AerCap Holdings had adjusted debt of $24.8 billion and adjusted debt to equity of 2.7.
I don’t see debt as a concern. As of June 30, AerCap Holdings had average remaining lease term of 6.4 years; this is likely to ensure steady cash inflow and smooth debt servicing.
Strong growth pipeline
With remaining lease term of 6.4 years, AerCap Holdings has smooth earnings visibility. To justify the bullish momentum for the stock, growth needs to be discussed and AerCap Holdings has interesting plans on that front.
Overall, AerCap Holdings has 429 aircraft on order that are scheduled to be delivered over the next five to six years. I see the following positive triggers:
- As of June 30, the average age of the company’s owned aircraft fleet was 7.3 years. With the company’s strategy of selling older aircraft and with steady pipeline of new aircraft, the average age of the fleet will decline and newer aircraft generally command longer lease term. This will boost the company’s revenue and cash flow visibility.
- AerCap Holdings has 54 aircraft deliveries for the remainder of fiscal 2017, 64 aircraft deliveries in fiscal 2018 and 94 aircraft deliveries in fiscal 2019. With a strong pipeline of new aircraft in the next two to three years, revenue growth along with cash flow is likely to be robust and should take the stock higher.
An important point to note here is that growth will be backed by leverage, but I don’t see that as a concern. Increase in debt will also be associated with an increase in cash flows and debt servicing is likely to remain smooth in the coming years.
Another key factor to note is that AerCap Holdings reported fleet utilization of 99.5% for the second quarter, and the overall industry outlook is positive considering strong leasing activity from emerging Asia, Latin America and Africa among others. Long-term leases for new aircraft delivery are unlikely to be a concern.
Conclusion
AerCap Holdings has trended higher year to date, and the key factor supporting the upside is strong growth outlook for the next three to five years. As new aircraft join the fleet, the company’s revenue and cash flow will swell and this will trigger sustained upside for the stock.
Importantly, industry dynamics are favorable; as growth stabilizes in China and other emerging markets, the demand for aircraft leasing is likely to remain stable.
Even after the recent upside, AerCap Holdings is worth considering at current levels with a medium- to long-term investment horizon.
Disclosure: No positions in the stocks discussed.
