During the fourth quarter of 2013, AerCap Holdings NV (NYSE:AER) was a popular stock among hedge funds, with many managers, such as Eric Chen of Antipodean Advisors, Ross Margolies of Stelliam Investment Management and Ken Heebner of Capital Growth Management, reporting new stakes in this aircraft lessor. Other new shareholders with stakes in excess of 1% of AER’s shares outstanding include Michael Price / Amos Meron of Empyrean Capital Partners, Robert Pitts of Steadfast Capital Management and Anand Parekh of Alyeska Investment Group.
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AerCap Holdings NV (NYSE:AER) is a $4.9 billion market capitalization integrated aviation company that engages in the leasing, financing, trading, sales and management of commercial aircraft and engines. On December 16, 2013, it announced the acquisition of ILFC (International Lease Finance Corporation) from American International Group Inc (NYSE:AIG) in a cash and stock deal valued at approximately $5.4 billion, with closing expected during 2Q14. The combined company will be the largest global franchise in the aircraft leasing industry, with a fleet of 1,329 aircraft and an order book for an additional 385. Financially, the merged company will have annual revenue of $5 billion, net profit of $1B, operating cash flow of $3B, run-rate EPS of $4.00 and return on equity of roughly 15%. The transaction will produce meaningful cost savings and operating efficiencies as well as a lower tax expense, as ILFC will relocate to AER’s headquarters in Ireland (which has a lower tax rate than the U.S.). Although AER is taking on additional debt to finance the deal, future profits and synergies are expected to reduce its leverage meaningfully over the following four to five years.
Following the deal announcement, AerCap Holdings NV (NYSE:AER)’s stock price has doubled but its valuation still looks reasonable, trading at a forward P/E of 13.5X (versus peers trading between 14.4-16.8X), possibly reflecting a combination of uncertainty related to ILFC integration risk as well as difficulty in forecasting earnings for such a complex transaction (EPS estimates for 2014 range from a low of $2.70 to a high of $3.74, while the for 2015 is even wider, with a low of $3.00 to a high of $5.25). However, as the acquisition closes and investors gain more clarity on the earnings benefit from it, both the multiple and estimates should improve.
Given the large size of the deal, which quadruples AerCap Holdings NV (NYSE:AER)’s existing fleet size, execution will be key to driving further upside in the stock. The order book will also play an important role, as the combined company will be taking delivery of highly fuel-efficient models through 2018 and beyond on very favorable terms, just when demand for such aircraft is high. Combined with increased passenger traffic globally and a healthier base of airline customers (following recent consolidation activity), AerCap Holdings NV (NYSE:AER) is well-positioned to benefit.