Aercap,
Q1 2019 - Results
May, 08 2019
1. CONTEXT
When I first analysed Aercap I had no knowledge whatsoever about the air leasing industry so I spent a whole week digging deep on its statements, industry reports and reading what others had written about it.
I liked it so much that I seized the opportunity to study Airlease as well. I remember reaching the conclusion that both of the companies were undervalued by Mr. Market. Here is my first write-up:
2. RESULTS
Aercap released its Q1 results on the 1st of May. Let’s take a look at them.
3. POSITIVES
3.1. Lease revenue went up
Lease revenue was up by +4% due to the increase in average lease assets. This came as a pleasant surprise.
3.2. Operating margin went up
The operating margin which has usually stayed around the high 40’s, has reached 51% due to lower expenses.
3.3. Net spread went up
Because Aercap’s business is the spread business, this is one of the most important metrics we should be looking at.
The annualized net spread less depreciation and amortization was 3,3% compared to 3% a year ago.
3.4. Order Book
It’s interesting to see that the company didn’t change its deliveries outlook for the Boeing’s 737-MAX. It still expects to get 17 units delivered by the end of this year.
There are two key takeaways from this: The first is that Aercap didn’t cancel those orders (good news for Boeing) and the second is that Aercap is probably one of the first clients to which Boeing will deliver the airplanes (if this wasn’t the case, it would show a larger number of MAX deliveries deferred to the next couple of years).
3.5. Number of shares outstanding went down
One of the strongesy arguments for buying Aercap’s stock is the fact that the company is doing just that, aggressively buying back its own stock.
In the first quarter the company bought back 3.1 million shares for $137 million.
3.6. Book value went up
And the second biggest argument is that the share buyback program will increase the book value per share.
3.7. Liquidity is still high
Aercap long term goal of maintaining a liquidity level (cash+ existing credit) of at least 1,2x next twelve months expenses has been achieved throughout the last eight quarters.
4. NEGATIVES
4.1. Sale of assets went down
In the first quarter the company has sold 19 airplanes for $340M compared to the sale of 21 airplanes for $757M in the first quarter of 2018. If we do the math, this represents a net margin of 6,3% versus a net margin of 11,7% in 2018.
4.2. Total revenue went down
This is not new, we had already reached the conclusion that revenue should be going down as they sell the ILFC older planes.
4.3. Cost of debt went up
Due to the issuing of new longer term bonds to replace shorter term notes used to finance the ILFC acquisition, the cost of debt went up from 4% to 4,2%.
4.4. Net income went down
And because of all of the above, the net income went down as well.
This is why the company chooses to talk about core earnings (those coming from the leasing business alone, excluding the sale of airplanes). Core EPS was up by 27%.
5. OVERVIEW & CONCLUSION
5.1. OVERVIEW
There are no big changes to my view about the company.
It still is the largest independent air leasing company in the world, it’s still buying back its own shares, it’s still increasing its book value, it still has high visibility on its revenues, the global air traffic is still increasing and most important of all, it’s still undervalued by Mr. Market.
The current price to book is 0,74 and its forward PE ratio is 7,6 when it should be trading for at least 1x book value or 10x earnings, which would be around $65 to $67 (30% more than the current $50).
Something though that I didn’t pay close attention to before and I should in the future is the fact that, as the years go by and the company sells its older planes acquired from AIG, the net spread will decrease and as the revenue from the sale of airplanes goes down, there will be a slowdown in the share buyback program as well.
5.2. CONCLUSION
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