Finally, the merger between AerCap Holdings (AER) and Genesis Lease (GLS) will be finalized today, creating the largest independent airplane leasing company. It also creates an earnings powerhouse. For 2010, they expect to earn well over $2/share with the stock trading below $11 now. A P/E of 5 is absurd now that global growth has returned and most of their customers should see growth even in the US market. Not to mention that 5 years earnings growth is placed at 12.5%, meaning a fair valuation would be around $25.
The finalization of this merger should hopefully bring much more focus to how cheap the combined entity remains. Both stocks have rallied big time since the March 2009 lows, but they still remain insanely cheap on a historical basis. The risks of airlines going bankrupt is greatly reduced now that the financial crisis is largely over. Also, the inability of Boeing (BA) to produce its new plane has helped reduce the competition for their existing planes. It will now be years before those new planes reach a critical mass.
The stock was at $16 just prior to the Lehman (LEHMQ.PK) blowup and considering that the airline leasing business has faced little in the way of long term impacts a la share dilutions, major customer bankruptcies, or financing issues, it's actually remarkable that the stock is still that far below the pre-Lehman value. Meanwhile the overall market, that had numerous stocks significantly diluted or basically forced out of business, is approaching those levels.
In fact, some major competitors like ILFC, part of the callouses mess of AIG, have been impacted to the point that AER now has a better financing situation and hence a competitive advantage they would've never had in the past. Of course, some fears have existed that ILFC would flood the market with cheap planes via a distress sale, but now that seems very unlikely with ILFC issuing debt and AIG raising major funds via a couple of large asset sales.
That was just one of the major hurdles that AER and even GLS faced in the last 2 years. First, the market feared that all of their customers were going bankrupt, which only happened on a small scale. Both companies had a handful of planes returned at most. Then, lease rates were going to be greatly impacted. AER just reported a 40% increase in the net spread (lease rates minus interest expenses). Next, financing was going to be a huge problem. Both companies were able to rather easily obtain financing for new planes or deals. Heck, the biggest complaint with GLS is that they had an expensive credit line that wasn't used. Quick, name another debt laden industry where shareholders faced the issue of credit lines that were too big.
For an industry rather unscathed by the crisis, it's amazing that the stocks originally sold off so much and have in reality recovered so little. Utilization rates remain in the upper 90% range and AER has a full plate of new planes coming on board with lease terms of 100 months. It's hard to find companies with such compelling locked in gains with little downside. If they were so unscathed in the worst crisis in 70 years, why the unwillingness to pay a reasonable price?
With the closing of the merger, it's hopeful that this uncertainty (AER has been counting on GLS for some financing clout) will help to unleash the stock. The combined entity will be valued at $1.3B, possibly placing it into a tier that will obtain more analyst coverage. When compared to other industries that operate on long term leases, airplane lessors compare favorably to deepwater drillers (RIG or ATW) or shippers (FRO or TK). AER typically has much longer leases providing much more stability. Of course, it does limit the upside that you can see when global demand soars, but as we've seen in such cyclical industries it's much better to have constant, very profitable rates.
Read the latest earnings report from AerCap and you'll start to wonder why Wall Street isn't buying this stock hand over fist.
Disclosure: Long AER, GLS