When Aircastle Ltd. (AYR) reported earnings earlier in the month, the headline numbers didn’t look all that impressive. The company reported revenue of $135.8 million which was $22 million below the fourth quarter of 2008, and earnings per share came in at $0.29 (adjusted 0.27) which is significantly below the level of earnings from the same period last year. However, the details regarding the company’s overall business environment were actually quite encouraging.
Aircastle is an aircraft leasing company which purchases passenger or freight planes and then leases them under long-term contracts to airlines and freight companies. AYR has taken a very diversified international approach with its fleet of 129 aircraft spread out between 60 different customers in 30 different countries. The focus appears to be passenger planes with only 29% of the vehicles being used for freight. Looking at the length of contracts, the weight average remaining lease term is 4.9 years. This gives investors a fairly stable picture of base revenues for upcoming quarters.
Since owning aircraft can be a very capital intensive business, AYR has a significant debt load of roughly $2.5 billion. With access to capital curtailed over the last two years, you might think that the company would have struggled to meet its obligations. However, management has done an incredible job getting the company through the crisis and the Aircastle which has emerged is much stronger than many would have expected if they had foreseen the coming economic struggle.
Near the peak of the market, management had the wisdom to pursue a conservative growth strategy, deciding not to purchase additional aircraft at excessive prices when the economic fundamentals appeared to be peaking. This allowed the company to continue through the crisis with a stable balance sheet and positive earnings. While management did decrease the dividend to maintain a healthy cash balance, investors likely understand and appreciate this move which was likely instrumental in causing the stock price to rebound sharply from the March 2009 lows.
Since the economy has begun to turn, AYR has been able to order and take delivery of new and used aircraft at extremely attractive pricing which should lead to healthy growth in upcoming years. In the fourth quarter, the company found homes for 11 of 12 new Airbus A330s which it will take delivery of in the coming quarters. Six of these planes will be leased to South African Airways beginning in 2011 in what management calls “further evidence in the recovery of aircraft leasing.”
Fundamentally, AYR appears to be trading at a very attractive price. The company is expected to earn $1.12 this year and $1.14 in 2011. These numbers are likely conservative as AYR has a stable base of customers but could very easily pick up additional aircraft and put them to work in the lease pool which could immediately add to earnings. With a current stock price of $9.73, investors are paying just 8.5 times forward earnings which is quite conservative considering the long-term nature of the firms leases. On top of that, investors are being paid 4% annually through the dividend and it would not surprise me to see management increase that dividend now that cash balances are increasing and the global economy is considered to be more stable.
The stock is listed at 0.7 times book value which means that if the company sold all of its assets and repaid its obligations, investors would immediately realize a near 50% return. The discount is likely due to questions about the book value of the aircraft. In today’s weak economy, it would be difficult to sell all of the aircraft for a reasonable price – and instead investors are looking at the high debt levels. But as long as the company is able to maintain payments on the debt and has healthy productive assets to back up any needed refinancing, the picture should remain rosy.
Aircastle might not double in the next six months, but the value of the income producing assets on the balance sheet along with the potential for upcoming growth should support the stock and lead to reasonable growth. With the market looking a little extended, I prefer to own companies with a strong balance sheet, trading at a discount to book with the potential for increasing business. Aircastle appears to fit that bill.
FD: Author has long positions in Sound Counsel client portfolios
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