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 N.V. (NYSE:AER), Aircastle Limited (NYSE:AYR), and FLY Leasing Ltd(ADR) (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 Corp (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 Holdings N.V. (NYSE:AER) recently signed a $2.6 billion purchase and leaseback agreement with LATAM Airlines Group SA (ADR) (NYSE:LFL), 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.