Why Air Lease Stock Could Double

Why Air Lease Stock Could Double
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Air Lease Stock Is a High-Prospects Play on the Emerging-Market Demand for Planes

The top area for commercial aviation continues to be the emerging markets. Boeing Co (NYSE:BA) predicts that the region will continue to be a hotbed for planes.

Their reasoning is obvious: the rising wealth levels in places like China and India (home to about a third of the world’s population) trigger consumer spending on discretionary goods and services. This includes air travel.

An intriguing play on the rising demand for planes in the emerging markets is mid-cap stock Air Lease Corp (NYSE:AL), a buyer of new passenger jets from Boeing and Airbus SE (OTCMKTS:EADSY, EPA:AIR) that are then leased to airlines worldwide.

To put it into perspective, Air Lease owns around 244 narrowbody and widebody planes, with orders for around another 368 new planes to be delivered by 2023.

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The top three regions for Air Lease are Europe, Asia, and China, while the U.S. generates about five percent of its business. The company currently has planes leased to 91 airlines in 55 countries and has relationships with over 200 airlines in 70 countries. (Source: “2017 Annual Report,” Air Lease Corp, last accessed February 15, 2019.)

For those who love dividends, Air Lease Corp has increased its annual dividends by at least 10% in each year from 2013 to 2018.

On the stock chart, Air Lease stock declined to a 52-week low of $32.17 on December 17 prior to seeing a V-shaped rally back to the previous channel. Now the share price remains below its range high of $47.34.

Chart courtesy of StockCharts.com

A breakout could launch AL stock toward $46.00 and $50.00.

My Bull Case for AL Stock

Air Lease has delivered higher revenue in four straight years, achieving a five-year high of $1.5 billion in 2017.

The company had three straight years of double-digit revenue growth from 2014 to 2016.

Fiscal Year Revenue (Billions) Growth
2013 $0.86
2014 $1.05 22.3%
2015 $1.22 16%
2016 $1.41 16%
2017 $1.52 7.2%

(Source: “Air Lease Corporation,” MarketWatch, last accessed February 15, 2019.)

The softer growth in 2017 appears to be an outlier. AL stock is expected to report revenue growth of 10.9% to $1.7 billion for 2018, followed by growth of as much as 25.8% to $2.1 billion in 2019. (Source: “Air Lease Corporation (AL),” Yahoo! Finance, last accessed February 15, 2019.)

But much of the revenue growth will depend on the global economy holding up and financing rates not accelerating higher.

Air Lease is highly profitable and generates positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal Year EBITDA (Billions) Growth
2013 $0.77
2014 $0.95 24.3%
2015 $1.12 18.1%
2016 $1.31 16.9%
2017 $1.40 6.9%

(Source: MarketWatch, op cit.)

As far as the bottom line goes, Air Lease reported higher generally accepted accounting principles (GAAP) diluted earnings per share (EPS) in three of the past four years.

Fiscal Year GAAP Diluted EPS Growth
2013 $1.80
2014 $2.38 32.2%
2015 $2.34 -1.7%
2016 $3.44 47%
2017 $6.82 96.3%

(Source: Ibid.)

On an adjusted basis, AL stock is estimated to earn $4.59 per diluted share in 2018, versus $3.65 per diluted share in 2017. For 2019, Air Lease could earn as much as $6.34 per diluted share. (Source: Yahoo! Finance, op cit.)

The fact that Air Lease is driving higher revenue and earnings growth is critical for such a capital-intensive business.

Analyst Take

The valuation of Air Lease stock indicates an attractive situation. Based on the company’s high EPS estimate for 2019, AL stock trades at six-times its EPS.

Further support for a value play is the price/earnings-to-growth (PEG) ratio of 0.34, which is ridiculously cheap and points to the stock trading at one-third of its expected earnings growth.

Furthermore, AL stock trades at a mere 0.88-times book value. The low valuation and strong dividend flows should give the stock some downside support.

With all these things going for it, we could see Air Lease stock double in value.