Aircraft leasing companies have been on the warpath lately, but I see no reason that the upward rise can’t continue. These leasing companies depend on demand for more planes by airlines. The global economy is looking better, and in the coming years is likely to continue improving.
There is no set rule that a certain amount of gain is enough. Most of our brains, including mine, are wired that way. Something has already doubled? Well we should stay away. Obviously, if you find a company with fundamentals just as strong that hasn’t moved, then it might be smarter to go with that one. There is still no law of the universe that says a company that doubled can’t double again. It’s like when we flip coins and get three heads in a row, and we think it has got to be tails next. When we get heads three more times, then we’re even more sure that tails is coming. Every flip is 50/50 and there’s no rule stating when you’ve had enough heads, or when it’s time for some tails.
Fly Leasing Ltd (ADR) (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 revenue was 63% better than 2011, and adjusted per-share earnings were $4.48, representing a 225% increase over 2011. That’s a pretty significant gain versus the previous year. Aircraft leasing companies tend to have very high margins as long as they’re 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.
The company just amended an old PR that projected a one-time charge over $25 million. That number is now revised to around $4 million, which might explain the nice increase since Monday, which was carried forward by positive earnings. 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 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%. Debt is not an issue.
These companies are all about income, and Fly Leasing Ltd (ADR) (NYSE:FLY) will be increasing its fleet with $300-$500 million in fleet additions in 2013. That’s substantial and will grow revenue once the planes are delivered. Fly will make their debt payments, keep some cash in reserve and return the rest to shareholders. The company will likely maintain its dividend, which has a yield around 6%. There has been no word yet of further increases, but it was just increased 6 months ago. More revenue will be needed to increase the dividend. The company aims for 10% 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 they trade below book value. Since they all own assets that can have a functional life longer than their accounting life, the companies present nice, safe entries. Fly Leasing Ltd (ADR) (NYSE:FLY) has a book value per share of around $18.97 and currently trades around $14.50.