Earnings Hindsight: AerCap

AerCap Holdings 2Q 2023

• EPS: $2.56 vs. $2.06

• Revenue: $1.92 billion (up 15% YoY) vs. $1.82 billion

• Raised FY EPS guidance to $8.50 to $9.00 (consensus $8.81)

• Company executed 215 aircraft/engine transactions in the quarter, including 59 sales.

Key quote: “We still see significant value in our stock. So we're not waiting around for GE to come to market to use that. And when you think of all 3 programs together, that's $1.5 billion, that's more than 10% of our market cap at the mid of the year. So it's a lot, but we're going to continue to deploy a lot of capital for buybacks. And I think the fact that we're below our target just shows that there is more capacity to come.” - Peter Juhas, chief financial officer

And now a brief (paid) endorsement:

To the extent that this content is intelligent, it is so because I use tools like Koyfin to make sure I have the best charts, data, analysis, and transcripts available. Koyfin provides a lot of the same tools you get with a Bloomberg terminal or Capital IQ at a fraction of the price.

Interested? Click the button below to get 10% off your first year using Koyfin.

Why we should have seen this coming: Boeing and Airbus have been clamoring about demand. The airlines are talking about new normals and scrambling for capacity. Production lines are sold out for years to come. So, it is no wonder the world’s largest airplane owner is seeing robust demand.

AerCap is a finance company for airlines. In the old days, the airlines had to buy planes themselves. Nowadays they have an asset-light model, signing long-term leases with companies like AerCap instead. (Remind me to give you the origin story for this industry at some point.)

AerCap was already the biggest player in this market, and a few years ago bought its closest rival from General Electric when GE desperately needed the cash. GE is now a major shareholder, and the stock has to some extent been held back by the knowledge that sooner or later, GE is likely to sell that stake into the market.

Some of us have been saying for a while now that GE’s eventual sale is nothing to fear. (AerCap has already run this playbook once to great success, buying the AIG portfolio back when AIG was in trouble.) Juhas’ quote should reassure investors things are under control.

How to think: AerCap makes its money (1.) on spread (buying airplanes via debt and then leasing them out at a higher rate than its borrowing rate) and (2.) via asset sales. As mentioned, aircraft are in high demand right now. It’s a seller’s market.

Oversimplifying a bit, but I want to be sure this point is understood: AerCap management right now is telling us they are buying back shares at a discount to book value, funding the buybacks with cash raised by selling assets at a premium to their book value.

Obviously, that won’t last forever. But it is a pretty neat trick while it lasts! And that’s sorta the bottom line on AerCap. They are very good at what they do. To my eyes, they are the best at what they do.

AerCap shares are up 270% since their March 2020 COVID low. They navigated through the pandemic better than I would have ever imagined, even with all of the debt they take on as a nature of their business. They then navigated through the onset of the Russia/Ukraine war (a chunk of their fleet is still stuck in Russia, earning nothing).

Debt stood at 2.51x equity at quarter’s end. That will continue to scare off some investors. Those investors are mistaken. I continue to view AerCap as the single best way to invest in the long-term trend of aviation growth due to an ever-shrinking world and a growing global middle class, better than taking on the risk that comes with buying an airline.

I’m not buying the shares today. Let’s just say I already have a fully allocation of this one (one bright spot of COVID, I guess?). I don’t know if you should buy, sell, hold, or ignore me. But, full disclosure: inevitably when a new round of investors gets scared by this model and send the stock tumbling once again, I’ll likely take a hard look again.

AerCap is simply very good at what they do.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.