Aircraft Leasing Stocks Can Appreciate Further
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Aircraft leasing companies have been on the warpath lately, but I see no reason why their upward rise cannot continue. These leasing companies depend on airlines' demand for more planes. With the global economy looking better, and likely to continue improving in the years ahead, that demand shouldn't weaken anytime soon. I've found three aircraft leasing stocks potentially poised to take advantage of their strengthening market.
The ups and downs of aircraft leasing
For these companies, success lies in expanding their fleets while increasing both their top and bottom lines. In other companies, capital expenditures often take some time to start generating returns. But once an aircraft leasing company takes delivery of a new plane, it needs no further lead time to start making money. Each new leased-out plane should immediately add to both the top and bottom line.
If a new lease only affects revenue, that means the company has too much overhead or is taking on too much debt. If the company can't lease a plane at all, then you'll see the bottom line shrink, as the company maintains the plane and pays off the debt.
Fly Leasing (NYSE: FLY) has one of the best tickers ever. It also has a gross margin around 96%, which is nuts. I looked at the earnings transcript to get some color on the numbers. 2012 revenues were 63% better than 2011, and adjusted per share earnings were $4.48 representing a 225% increase over 2011. The company will likely maintain its dividend, which has a yield around 6%. No word yet on further increases, but the payout was just increased 6 months ago.
Aircraft leasing companies tend to have very high margins as long as they are leasing out most of their inventory, which is something to keep in mind for the other companies discussed here. Fleet utilization was 95% for 2012. I also noted that Deutsche Bank initiated coverage on Fly with a buy.
The amount of unrestricted cash, not including other short-term equivalents of cash, was $135 million. Debt-to-equity is 3.6, and will remain high since most planes are bought with debt in order to leverage the balance sheet and increase income to the greatest extent possible.
The company is focusing on reducing leverage, and its previously mentioned debt-to-equity ratio of 3.6 is down from above 4 previously. There are no significant debt maturities until 2018, and the company reduced cash interest expense by 1%.
These companies are all about income, and Fly will be increasing its fleet with $300 million-$500 million in fleet additions in 2013. That is substantial and will grow revenues once the planes are delivered. The company aims for 10% overall growth per year, and feels that it can achieve this due to its solid cash position, and de-leveraging of assets.
One of the most important things about most of the companies in this sector is that many trade below book value. Fly has a book value per share of around $18.97, and it currently trades around $14.50.
This Company Leases Airplanes
These companies share renewable energy companies' proclivity for names that get right to the heart of the matter. Air Lease (NYSE: AL) leases aircraft, too -- go figure! It is a far larger player than Fly, with a market cap of almost $3 billion versus FLY's $300 million range. The company also trades above book value, so it cannot be called as good of a value play as Fly.
However, Air Lease's last earnings call discussed its order book and both its size and diversity. It's adding a lot of new planes to its fleet. Its debt-to-equity is comparatively low at 1.8, giving it some flexibility with regard to expansion.
They are also committed to stability by locking in long-term deals. This obviously limits their ability to respond to increases in prices for the market, but it is safer than having your planes sitting around doing nothing.
The company is also issuing its first cash dividend, but this is very small at $0.025. The yield is the lowest of the bunch listed here. All the expansion should increase income in the future. The company doubled its revenue in 2012 compared to 2011, and I think it aims to grow revenues instead of returning cash to shareholders for now.
Aircastle (NYSE: AYR) rounds out the bunch with a market cap of around $1 billion, putting it right between the other two. It has a dividend yield close to 5% and has over $700 million in cash. That makes it the cash king in this group, though this increase is due to raising $1.6 billion in unsecured debt. Its debt-to-equity is at 2.5. It is likely cash and debt will be used to expand their fleet. The book value per share is $20.30, far above the current price.
The earnings call reporting 2012 earnings showed that compared to 2011, Aircastle only had a 9% increase in top-line revenues, which is far less than the other two companies listed here keeping it off the top spot. They did highlight something important, though. Passenger travel grew 5.3% in 2012, which is in line with historical growth rates. Air cargo shrank by 1.5%, but is extremely sensitive to the economic cycle. Things are improving, but things are still weak. Real gains are yet to come as the global economy improves.
I like Fly because it trades below book value and offers a nice dividend. Air Lease has also shown that it can grow revenues dramatically. Both companies seem like great choices, but I would most likely go with Fly.
I expect Fly to have capital appreciation, and its dividend will further amplify its overall returns. And if the sector doesn't move until the economy really starts gunning, reinvesting Fly's dividend could help build up your position, and increase your eventual returns.
Nihar Patel has no position in any stocks mentioned. 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!