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.
This company leases airplanes
These companies share renewable energy companies’ proclivity for names that get right to the heart of the matter. Air Lease Corp (NYSE:AL) leases aircrafts too, go figure. It’s 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 so it can’t be called as good of a value play as Fly Leasing Ltd (ADR) (NYSE:FLY). It is, however, expanding its fleet. The last earnings call discussed their order book and both its size and diversity. They’re adding a lot of new planes to their fleet. Their debt-to-equity is comparatively low at 1.8, giving them some flexibility with regard to expansion.
They’re also committed to stability by locking in long-term deals. This obviously limits the company’s ability to respond to increases in prices for the market, but it’s safer than having planes sitting around doing nothing. The planes need to be flying. However, I’m not sure this really differentiates the company from its peers. 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 revenue instead of returning cash to shareholders.
Aircastle Limited (NYSE:AYR)
Aircastle Limited (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 of this group, though this increase is due to raising $1.6 billion in unsecured debt. Its debt-to-equity is at 2.5. It’s likely that cash and debt will be used to expand their fleet. The book value per share is $20.30, far above the current price.
The 2012 earnings call reported that, compared to 2011, Aircastle Limited (NYSE:AYR) only had a 9% increase in top line revenue, far less than the other two companies listed here, and the reason Aircastle Limited (NYSE:AYR) isn’t in 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. The company’s situation is improving, but things are still weak. Real gains are yet to come as the global economy improves. I wish there was some kernel of amazing information that would make me sound brilliant, but there isn’t. These companies will benefit as the economy gets going, and there’s no magical factor that’s going to make one of these companies king of the stock market.
The article Aircraft Leasing Stocks Can Appreciate Further originally appeared on Fool.com and is written by Nihar Patel.
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