AL Stock Study (10-16-23)

Posted by Mark on December 27, 2023 at 06:41 | Last modified: October 16, 2023 13:35

I recently did a stock study on Air Lease Corp. (AL) with a closing price of $35.74. Previous studies are here and here.

M* writes:

     > Air Lease Corp is an aircraft leasing company based in the
     > United States. However, it derives its revenue from the Asia
     > region. Its business involves purchasing aircraft from
     > renowned manufacturers such as The Boeing Company
     > (Boeing) and Airbus S.A.S and leasing them to airline
     > companies across the world. Its suite of aircraft entails
     > single-aisle narrow-bodied jets and twin-aisle wide-bodied
     > aircraft. The company’s primary source of revenue
     > originates from the leasing of aircraft and to a
     > certain extent from the provision of fleet management
     > services to investors and owners of aircraft portfolios.

Over the past decade, this medium-size company has grown sales 11.1% per year. Earnings have grown 11.3% per year from ’13-’21. I am excluding the 2022 GAAP loss of $1.24/share due to aircraft in Russia. From the 2022 10-K:

     > In response to the sanctions, in March 2022 we terminated
     > all of our leasing activities in Russia, consisting of 24
     > aircraft in our owned fleet, eight aircraft in our managed
     > fleet and the leasing activity relating to 29 aircraft that
     > that had not yet delivered from our orderbook, all of which
     > have been subsequently placed. In the first quarter of
     > 2022, we also canceled five aircraft in our orderbook that
     > were slated for delivery in Russia.
     >
     > While we or the respective managed platform maintain title
     > to the aircraft, we determined that it is unlikely we or
     > they will regain possession of the aircraft that are
     > detained in Russia. As a result, we recorded a write-off of
     > our interests in our owned and managed aircraft that are
     > detained in Russia, totaling approximately $802.4 million
     > for the three months ended March 31, 2022. The 21 aircraft
     > that remained in Russia were removed from our fleet as of
     > March 31, 2022.

Excluding ’22, sales are up and mostly straight while earnings peak in ’19 (excluding ’17 when EPS spikes ~100% due to TCJA). PTPM is higher than peer and industry averages by increasing from 34.2% in ’13 to 40.9% in ’16 before heading down to 25.9% in ’21 for a last-5-year mean (excluding ’22) of 33.2%.

ROE is slightly better than peer averages and mostly lower than the industry in going from 7.5% in ’13 to 11.4% in ’18 (’17 excluded due to TCJA) before falling to 6.2% in ’21 for a last-5-year mean (excluding ’22) of 9.1%. This is slightly better than peer averages and mostly less than than the industry.

Debt-to-Capital averages 71.8% over the last five years, which is less than than peer and industry averages but still uncomfortably high. M* lists Interest Coverage as 13.0 and Quick Ratio as 0.37. FCF has been negative since at least ’20.

Despite the red flags, M Ramirez writes in this SA article:

     > The main negative point for the market is that Air Lease is
     > a finance company and as such needs a lot of debt to operate
     > on a large scale with the assets it holds. Leverage is
     > currently high (about 2.5 debt/equity), although in no case
     > is the amount of debt greater than the total value of the
     > company’s assets… although a priori the debt seems exorbitant,
     > the company finances more than 95% of the debt at a fixed rate
     > (…close to 3%), which, together with the high predictability
     > of its cash flows, makes it practically impossible for the
     > company to go bankrupt. The company could stop aircraft
     > purchases for 5 years and with the cash flows repay half of
     > the debt without increasing rents to the lessees.

With regard to sales growth:

• CNN Business projects 17.4% YOY and 16.1% per year for ’23 and ’22-’24, respectively (based on 7 analysts).
• YF projects YOY 16.0% and 12.0% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 15.4% and 11.2% for ’23 and ’24, respectively (3).
• CFRA provides ACE of 16.1% growth YOY and 14.0% per year for ’23 and ’22-’24, respectively (7).
• M* gives an ACE of 16.7% per year for the next two years.

I am forecasting below the range at 11.0% per year.

With regard to EPS growth:

• CNN Business projects 19.0% YOY for ’24 (based on 7 analysts) along with 5-year annualized growth of 9.8%.
• MarketWatch projects 24.1% YOY and 21.3% per year for ’24 and ’23-’25, respectively (7 analysts).
• Nasdaq.com projects 21.6% YOY and 27.6% per year for ’24 and ’23-’25 [5, 5, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized growth of 9.8%.
• YF projects 30.4% YOY growth for ’24 (7) along with 5-year annualized growth of 26.2%.
• Zacks projects 21.6% YOY for ’24 (5) along with 5-year annualized growth of 9.8%.
• Value Line projects 13.9% from ’23 to ’24/’25 and provides an ACE (5) of 9.8% per year for the next five years.
• CFRA projects growth of 21.4% YOY for ’24 (2).

Three of four long-term estimates are 9.8% with the fourth extremely high. I am disregarding the latter in case it was calculated off a negative base and forecasting below the former at 7.0%. Sans write-off (discussed above), I calculate ’22 earnings at $5.67/share rather than -$1.24. This results in high EPS of $7.95/share.

My Forecast High P/E is 9.0. From ’13-’21, high P/E ranges from 7.2 in ’17 to 18.6 in ’13 with a last-5-year mean of 11.7. The last-5-year-mean average P/E is 9.5. I am forecasting near the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 5.5. From ’13-’21, low P/E ranges from 5.0 in ’17 (1.9 in ’20 excluded due to COVID-19) to 14.6 in ’14 with a last-5-year mean of 7.4 . I am forecasting near the bottom of the range (only ’17 is lower).

My Low Stock Price Forecast (LSPF) of $24.80 is default based on $4.50/share initial value. This is 30.6% less than the previous close and 18.2% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 4.8% in ’17 to 18.6% in ’21 with a last-5-year mean of 13.1% (2022 NMF excluded). I am forecasting conservatively at 5.0%.

These inputs land AL in the BUY zone with a U/D ratio of 3.3. Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average—not High—P/E) of 10.7% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 185 studies over the past 90 days (my study and 72 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.6%, 11.9%, 11.0, 6.0, and 9.0%, respectively. I am lower across the board.

MS high/low EPS is $7.53/$4.20 vs. my $7.93/$5.67 (per share). My high EPS is higher due to the higher initial value. As evidenced by MS mean EPS growth of 39.0%,others have also dealt with significant confusion in figuring out how to deal with negative EPS in ’22. This somewhat obscures my ability to determine MOS because MS data are highly scattered.

MS LSPF of $27.70 implies a Forecast Low P/E of 6.6 vs. the above-stated 6.0. MS LSPF is 9.9% greater than the default value of $4.20/share * 6.0 = $25.20, which results in more aggressive zoning. MS LSPF is also 11.7% greater than mine.

My TAR (over 15.0% preferred) is less than MS 17.5%. Despite a higher EPS range, MOS seems robust in the current study.

I track a few different valuation metrics. PEG is 0.8 and 1.4 per Zacks and my projected P/E, respectively: both quite reasonable. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is also reasonable at 0.9. For once, these metrics are in relative agreement with each other.

AL is a BUY under $36. With a forecast high price at $71.30, TAR should meet my 15% criterion right about now.