Business snapshot
Fly Leasing, incorporated in 2007 in Bermuda, is in the business of purchasing commercial aircrafts, which would be leased under multi-year contracts to many airlines in the world. The company operates total 109 commercial jet aircrafts, including 103 narrow-body passenger aircraft and six wide-body passenger aircraft.
Fly Leasing Ltd(ADR) (NYSE:FLY) derived most of its operating lease revenue from Europe, with around $170.3 million, or 45.2% of total 2012 revenue. Asia and South Pacific ranked second with $110.74 million in revenue, while North America generated only $45.2 million in leasing revenue in 2012.
A cash cow with extremely high leverage
Since 2008, Fly Leasing Ltd(ADR) (NYSE:FLY) has witnessed higher revenue but widely fluctuating net income. Its revenue increased from $236 million in 2008 to $433 million in 2012, while net income has fluctuated in the range of $1 million to $113 million during the same period. In 2011, its net income came in at only $1 million. The low profit in 2011 was due to the low lease revenue and high operating expenses, including the acquisition cost of more than $18 million.
In 2012, Fly Leasing Ltd(ADR) (NYSE:FLY) generated $433 million in revenue and $48 million in profit. What I like about Fly Leasing is its consistently growing operating cash flow, which has grown from $111 million in 2008 to $180 million in 2012. Since 2009, its free cash flow has kept increasing from $74 million to $130 million.
In the leasing business, investors should expect the company to have huge leverage. Indeed, that is the case with Fly Leasing. As of December 2012, Fly Leasing had $532 million in total stockholders’ equity, $163 million in cash, $137.5 million in restricted cash, and nearly $2.3 billion in long-term debt. However, total contractual obligations have been spread out, so that the yearly contractual obligations fluctuate in the range of $236.9 million to $400 million. The debt/equity ratio is 4.3.
The Boeing Company (NYSE:BA) sells its 737-800 aircraft to Fly Leasing
Recently, Fly Leasing Ltd(ADR) (NYSE:FLY) had purchased a 2013-manufactured The Boeing Company (NYSE:BA) 737-800 aircraft to lease to Asian low-cost carrier under a 12-year lease term. Fly Leasing’s CEO, Colm Barrington, is excited about the B737-800, he said: “The B737-800 is an excellent commercial aircraft in strong global demand and this acquisition makes it the 38th B737 Next Generation aircraft in FLY’s fleet.”
Indeed, The Boeing Company (NYSE:BA) must be proud of its 737-800, as it has been the best-selling version of the 737 Family. This aircraft version is famous for its reliability fuel efficiency. Boeing described this version on its website: “The single-aisle jet, which can seat between 162 to 189 passengers, can fly 260 nautical miles farther and consume 7 percent less fuel while carrying 12 more passengers than the competing model.”
The 737 aircraft has had the highest cumulative deliveries among Boeing’s commercial airplanes. In 2012, the total cumulative deliveries of the 737 version were nearly 4,300, with deliveries in the year coming in at 415, accounting for 69% of the total deliveries in 2012.
Indeed, Boeing is still the global leading airplane manufacturer. After recovering from its new Dreamliner 787 delay, Boeing has surpassed Airbus to become the world’s biggest passenger airplane maker. According to Reuters, Airbus had a market share of around 41% with 833 aircraft net orders while Boeing took the lead with 1,203 aircraft net orders.
Boeing is trading at around $92 per share, with a total market cap of $69.9 billion. The market values Boeing at 8.7 times EV/EBITDA. Investors could get a decent dividend yield of 2.1% when investing in Boeing at its current trading price.
Peer comparison
Compared to its peers AerCap Holdings N.V. (NYSE:AER) and Willis Lease Finance, Fly Leasing has the highest leverage. The debt/equity of AerCap Holdings N.V. (NYSE:AER) is 2.7 while the debt/equity of Willis Lease is the lowest at only 1.5. AerCap is considered one of the global leading aircraft leasing companies with the youngest fleets in the industry, providing aircraft leasing and management services, with 212 aircraft and 7 engines.
Its weighted average owned aircraft utilization rate was around 98.4%. At the end of March, Cerebus Capital Management exited completely from AerCap after selling out as much as 8.2 million shares in the company. At $15 per share, AerCap is worth around $1.7 billion on the market. The market values AerCap Holdings N.V. (NYSE:AER) quite expensively at 13.7 times EV/EBITDA.
Willis Lease, the leader in leasing commercial aircraft engines, has a lease portfolio of 184 engines and related equipment, 7 aircraft and 4 spare parts packages. It provides its services to 78 lessees including commercial aircraft operators and maintenance, repair and overhaul organizations in 42 countries globally.
Like Fly Leasing Ltd(ADR) (NYSE:FLY), Willis Lease generated most of its revenue, $35 million, or 37% of the total lease revenue, in Europe. Asia ranked second with $18.6 million in lease revenue, while Willis Lease generated $11.7 million in lease revenue in the U.S. Willis Lease is trading around $19 per share, with a total market cap of $120 million. The market values Willis Lease at 8.5 times EV/EBITDA.
Among the three, Fly Leasing has the cheapest valuation at only 7.3 times EV/EBITDA. However, It is also the only company that pays dividends of the three. While Willis Lease and AerCap do not pay dividends, Fly Leasing offers investors juicy a dividend of 5.8%.
My Foolish take
Income investors might invest in Fly Leasing Ltd(ADR) (NYSE:FLY) for its high dividend yield. However, I do not consider Fly Leasing to be a good stock to buy due to its cyclical business and extremely high leverage level. Although I do not like the leasing business, I prefer the business of making aircrafts. Boeing, with its global leading position and the decent dividend yield, could be a long-term pick for investors.
The article Should We Buy This Stock for Its Yield? originally appeared on Fool.com and is written by Anh Hoang.
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