AL Stock Study (4-19-24)

Posted by Mark on April 12, 2024 at 10:56 | Last modified: April 19, 2024 12:28

I recently did a stock study on Air Lease Corp. (AL, $48.73). Previous studies are here, here, and here.

M* writes:

     > Air Lease Corp is an aircraft leasing company based in the U.S.
     > 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 earns from revenue originates from the
     > renting of flight equipment.

This medium-size company has grown sales and EPS at 10.1% and 7.2% per year from ’14-’23. 2022 GAAP loss of $1.24/share is excluded due to write-down of aircraft in Russia (operations terminated due to war sanctions).

Excluding ’22, sales are up and mostly straight while earnings peak in ’19 (excluding ’17 when EPS spikes ~100% due to TCJA) before finally being eclipsed in ’23.

Over the last 10 years, PTPM is higher than peer and industry averages despite generally trending down from 37.6% in ’14 to 28.1% in ’23 (excluding ’22) with a last-5-year mean of 30.7% (23.3% including ’22). ROE is slightly better than peer averages and mostly lower than the industry while ranging from 6.2% in ’21 (’22 excluded) to 11.4% in ’18 (’17 excluded due to TCJA) for a last-5-year mean of 8.3% (6.2% including ’22). Debt-to-Capital is less than peer and industry averages despite ranging from 70.1% in ’17 to 73.7% in ’22 with a last-5-year mean of 72.2%.

In a comment to this article, “Phx Suns” writes:

     > AL is a leasing company… using its investment grade balance
     > sheet to buy expensive equipment and lease it to non-investment
     > grade customers earning an interest spread. The historic…
     > 300bp [spread is]… now… closer to 500bp [due to] fixed…
     > cost of capital in 2020 and 2021 before… interest rate hikes.
     > With rates increasing… spread rises until… plane is delivered
     > and… 10-year lease locked in. Also, [on] weaker credit, [a
     > company] would have a tougher time borrowing at 9%-10% to
     > buy… vs. leasing… at 8% from AL.
     >
     > There is a shortage of planes – AL’s order book is receiving
     > planes now that were due to arrive in 2019-20. Its 2023 orders
     > may arrive by 2028… shortage of high-demand equipment makes
     > the value go up. AL has sold used planes for sizable gains
     > reflecting… depreciated value on the balance sheet [that] is
     > below fair market value for the assets. So the total aircraft
     > market is a growing pie and leasing is [becoming] a larger
     > slice… And there’s a 10-year backlog for planes on order…
     >
     > AL recycles capital by purchasing new planes and selling planes
     > that reach ages of 8-10 years… new planes… are cheaper
     > to operate, burn less fuel, [and] need less maintenance…
     > during COVID its planes were flying when other planes were
     > grounded… [Aircraft] sales [were] $1.9B from 2018-22… Take
     > note that aircraft sales were $524M from ’20-’22… in
     > first half of’23 – this was $1.26B.

Value Line gives a C++ rating for Financial Strength. A consistently negative FCF and high debt-to-capital are, as implied above, normal facets of the business model that may contribute to the low rating.

Interest Coverage is 14.9 per M*, and Quick Ratio is 0.35.

With regard to sales growth:

• YF projects YOY 6.3% and 9.7% for ’24 and ’25, respectively (based on 7 analysts).
• Zacks projects YOY 6.9% and 9.5% for ’24 and ’25, respectively (2).
• CFRA provides ACE of 7.3% growth YOY and 8.1% per year for ’24 and ’23-’25, respectively (3).

I am forecasting below the range at 9.0% per year.

With regard to earnings growth:

• MarketWatch projects 10.9% per year and 8.4% per year for ’23-’25 and ’23-’26, respectively (based on 7 analysts).
• Nasdaq.com projects 22.0% YOY and 29.6% per year for ’25 and ’24-’26 [3, 3, and 1 analyst(s) for ’24, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 13.0%.
• YF projects YOY 11.3% contraction and 18.2% growth ’24 and ’25 (7) along with 5-year annualized growth of 26.2%.
• Zacks projects YOY growth of 30.0% and 15.0% for ’24 and ’25 (3) along with 5-year annualized growth of 13.0%.
• Value Line projects 9.7% YOY and 15.7% per year for ’24 and ’23-’25, respectively (3), along with 5-year annualized growth of 13.0%.
• CFRA projects growth of 7.8% YOY and 17.3% per year for ’24 and ’23-’25, respectively (5).

My 10.0% forecast is well below the 4-long-term-estimate range (mean 16.3%). The initial value will be ’23 EPS $5.14/share.

My Forecast High P/E is 9.0. Over the last 10 years, high P/E ranges from 7.2 in ’17 to 18.0 in ’14 with a last-5-year mean of 11.2 and a last-5-year-mean average P/E of 9.3. I am forecasting near the bottom (’17 is lower and ’23 is also 9.0).

My Forecast Low P/E is 6.0. Over the last 10 years, low P/E ranges from 5.0 in ’17 to 12.6 in ’14 with a last-5-year mean of 7.5. I am forecasting near the bottom of the range [only ’17 and ’19 (5.8) are lower].

My Low Stock Price Forecast (LSPF) is $33.30. The default LSPF is $30.80. As this may be extreme (36.8% less than the previous close and 7.5% less than the 52-week low), I am using the 52-week low: 31.7% less than the previous close.

Over the past decade, Payout Ratio ranges from 4.8% in ’17 to 18.6% in ’21 with a last-5-year mean of 14.7% (2022 NMF excluded). I am forecasting conservatively at 5.0%.

These inputs land AL in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 9.4%.

PAR (using Forecast Average—not High—P/E) of 5.6% 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 118 studies over the past 90 days (my study and 33 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 10.4%, 10.5%, 10.8, 6.0, and 11.5%, respectively. I am equal to or lower than all.

MS high/low EPS is $8.28/$4.68 versus my $8.28/$5.14 (per share). Given the negative earnings in ’23, I can imagine going lower on the low EPS. 25 studies (21.1% of the sample) use a number under ’20 EPS of $4.39/share, though.

MS LSPF of $30.90 implies a Forecast Low P/E of 6.6 vs. the above-stated 6.0. MS LSPF is 10.0% greater than the default value of $4.68/share * 6.0 = $28.08, which results in more aggressive zoning. MS LSPF is 7.2% less than mine, however.

My TAR (over 15.0% preferred) is much less than MS 15.6%. MOS seems robust in the current study despite my impressions to the contrary (my EPS range is higher, my LSPF is higher, and my P/E range and EPS forecasts are only slightly lower).

With regard to valuation, PEG is 0.6 and 0.9 per Zacks and my projected P/E, respectively: both slightly cheap. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is reasonable at 1.02.

AL is a BUY under $43. With a forecast high price at $74.50, TAR should meet my 15% criterion around $37/share.