Aircastle Looks Good, Though Markets Demur

At the risk of repeating myself, I really do not understand why the market values Aircastle Ltd. (AYR) as low as it does. The aircraft leasing company has great cash flow, pays a nice dividend and has a low debt to value ratio. Let me lay out the facts;  remember, the current share price as I write this is $6.11 and the market cap of the company is $480 million. Figures are from Friday’s 3rd quarter earnings release.

• Aircastle’s modern fleet of aircraft has a book value of $4.0 billion. The company debt is $2.5 billion. They have $1.5 billion of equity in their aircraft vs. a market cap of $442 million.
• For the 3rd quarter AYR had free cash flow (net income plus depreciation) of $1.12 per share, or annualized $4.48 per share of free cash flow against a $5.63 share price.
• The annual dividend is $1.00 per share giving the stock a yield of 17.7%. They have 4.5 times coverage of the dividend in free cash flow.

These results are pretty much the same as Aircastle has produced for the last 3 quarters. Their aircraft are 99% leased out and all financing is secure until 2013. Every time the stock gets hammered I wonder what I missed, and each quarter the results come out with strong earnings and cash flow. I do not see any reason why this is not a $15 stock. If it was a $15 stock, the board might be tempted to start increasing the dividend, which they could easily do. At the current stock valuation they are just as well off keeping the cash or paying down debt.

Disclosure: AYR is a component of the author's site’s Income Portfolio.

Comments

[biomedlives:]

The numbers look good, and management seems to be on top of the situation. Nonetheless, I suspect that additional bankruptcies like Sterling's will present challenges in the future.

2008 Nov 08 09:05 AM

[icy:]

While there are no DC-3s in the fleet, the AYR fleet is not "modern". It is old. It is 122 months old, on average.

A year ago there was a reduction in the dividend. Now another looks likely.

People are enamored of the aviation business because of the perceived glamor or anticipated emotion. Aviation is now much more dangerous to an investor than to the aviator. Stay away from aviation and movie production if you wish to make money.

2008 Nov 08 10:30 PM

[Warlord:]

"10 years old" is ancient for a car, but is very young for an aircraft. Newer modern engines burn up to 50% less fuel, and most of AYRs fleet carry such engines.

Airlines found it cheaper to lease a newer generation aircraft than keep flying 30+ year old MD82s. Anticipating future fuel costs by locking in long-term leases for aircraft right now is a prudent thing for any airline to do. Many are finding they simply cannot buy the aircraft on the open market, so they lease (re: Boeing strike and 10 year backlog).

2008 Nov 09 10:36 PM