Buy These Aircraft Leasing Stocks Still Trading Below Book Value

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Even after substantial gains this year, a whole slew of financial stocks still trade below book value. As written about back in January, a good portion of airplane leasing stocks traded considerably below book value. While the fears from the financial crisis have mostly dissipated, the stocks continue to meander below book value even with strong earnings profiles.

While book values aren’t perfect, in many cases the airplanes are carried on the books at a lower valuation due to depreciation expenses. The stocks though, face fears of a rapidly rising interest rate environment. The leases on new planes can be locked in for 10 years, while the debt can be more short-term causing the interest margins to get squeezed if rates were to soar.

Airplane leasing firms still trading below book value

While not typically considered part of the financial sector, the airplane leasing stocks of AerCap Holdings (NYSE: AER), Aircastle (NYSE: AYR)and FLY Leasing (NYSE: FLY) continue to trade in a similar fashion to financial stocks. Back in January, the stocks traded at the low end of the valuation spectrum at levels close to 0.7 times book value. Now, even after strong market gains, the stocks still trade in the 0.8 times book value range.

As back in January, the leader in the group continues to trade at the highest multiple above book value. Air Lease (NYSE: AL) now trades at 1.2 times book value, as it remains a favorite in the sector due to fast growth and a well-respected management team.

The perplexing part of the equation is that analysts expect strong earnings into the future. The sector is expected to benefit from strong growth in global airplane demand combined with airlines capital structures requiring the leasing of planes. In fact, AerCap recently signed a $2.6 billion purchase and leaseback agreement with LATAM Airlines Group, a leading airline in South America. Profitable stocks continuously growing book value shouldn’t trade at a level below the value of the net assets of the stock.

10-Year book value chart

As the below chart highlights, the book value was typically closer to 2-3 times prior to the financial crisis. The typical stock in this group would need to more than double in order to reach that pre-crisis normalcy.

AER Price / Book Value data by YCharts

Earnings potential to grow book value

As with the insurance stocks listed in Part 1, the interesting dichotomy in this group of airplane leasing stocks is that the earnings potential remains strong. All of the stocks have solid earnings generation with solid, but not spectacular growth into 2014. The question is how a stock can trade below book value that generates solid profits that will grow that value.

AerCap Holdings is expected to grow earnings from $1.97 last year to $2.47 next year. The stock trades at the lowest forward multiple in the group at 7 times those estimates. The company has taken advantage of the stock trading below book value by consistently buying back stock.

Aircastle is expected to grow earnings from $1.54 in 2013 to $1.82 in 2014. Even on an earnings multiple basis, the stock trades at 8.7 times those forward numbers. The stock provides a solid 4.20% dividend yield.

While Air Lease is the only stock in the group trading above book value, analysts do expect earnings to surge from $1.28 in 2012 to $2.23 next year. On an earnings multiple basis, the stock trades at 12.5 times those forward estimates. Though analysts do expect revenue to surge 31% this year and 27% next year.

FLY Leasing is expected to see earnings drop from $2.44 in 2012 to $2.03 in 2014. The stock trades at roughly 7.9 times those forward earnings estimates. The stock provides a 5.50% dividend yield.

Bottom line

As mentioned in the original article, investors could probably spend months analyzing the best-positioned stock in the sector. In the end, these stocks will all trade in the general same pattern. Investors can purchase FLY Leasing due to the higher 5.50% dividend yield or AerCap for one of the lowest book values and the lowest forward earnings multiple.

Either way, investors need to own this sector along with other financials that continue to trade below book value even after the financial crisis is long over, especially considering that book values in the sector should only grow with a solid basis of earnings and even some growth.

With so much of the financial industry getting bad press these days, it may be a greedy when others are fearful moment. Not surprisingly, some of Warren Buffett's biggest investments are in the space. In the Motley Fool's free report, The Stocks Only the Smartest Investors Are Buying, you can learn about a small, under-the-radar bank that's too tiny for Buffett's billions. Too bad, because it has better operating metrics than his favorites. Just click here to keep reading.


Mark Holder and Stone Fox Capital Advisors, LLC own shares of AerCap Holdings N.V.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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