Aircraft Leasing Stocks Can Appreciate Further

Aircraft leasing companies have been on the warpath lately, but I see no reason that the upward rise cannot continue. These leasing companies depend on a 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 the company that doubled can’t double again. It is like when we flip coins and get three heads in a row, and we thing it has got to be tails next. When we get heads three more times, then we are even more sure that a tails is coming. Every flip is 50/50 there is no rule saying that you’ve had enough heads it’s time for some tails.

Super Fly

Fly Leasing (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 revenues were 63% better than 2011, and adjusted per share earnings were $4.48 representing a 225% increase over 2011. That is a pretty significant gain versus the previous year. Aircraft leasing companies tend to have very high margins as long as they are 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.

Image may be NSFW.
Clik here to view.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 the 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 $135M. 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 will be increasing its fleet with $300M-$500M in fleet additions in 2013. That is substantial and will grow revenues 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%. 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 has a book value per share of around $18.97 and it 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 (NYSE: AL) leases aircrafts too, go figure. It is a far larger player than FLY with a market cap of almost $3B versus FLY’s $300M range. The company also trades above book so it cannot be called as good of a value play as FLY. It is however expanding its fleet. The last earnings call discussed their order book and both its size and diversity. They are 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 are also committed to stability by locking in long-term deals. This obviously limits their ability to respond to increases in prices for the market, but it is safer than having your planes sitting around doing nothing. The planes need to be flying. Not sure that 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 revenues instead of returning cash to shareholders.

Aircastle

Aircastle (NYSE: AYR) rounds out the bunch with a market cap of around $1B putting it right between the other two. It has a dividend yield close to 5% and has over $700M in cash. That makes it the cash king in this group, though this increase is due to raising $1.6B in unsecured debt. Its debt-to-equity is at 2.5. It is likely cash and debt will be used to expand their fleet. The book value per share is $20.30 far above the current price.

The earnings call reporting 2012 earnings showed that compared to 2011 AYR only had a 9% increase in topline revenues, which is far less than the other two companies listed here keeping it off 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. Things are 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 is no magical factor that is going to make one of these companies king of the stock market.