Willis Lease (WLFC) is one of the largest independent aircraft engine leasing companies in the world. Willis also provides maintenance, repair, aircraft overhaul facilities as well as lease aircraft to air cargo carriers and commercial airlines. As of June 30, 2011 WLFC had 186 commercial aircraft engines, 3 aircraft and various other engine-related equipment in its lease portfolio with a book value of $1 billion.
WLFC also owns a 50% interest in WOLF A340, LLC. WOLF currently owns two Airbus A340 aircraft that are on lease to Emirates until 2013. WLFC is also in joint venture with Mitsui & Co, providing jet engine leasing services. The company currently owns seven engines, of which six are on lease. WLFC also recently opened a division in Ireland, and is expecting to increase their portfolio while taking advantage of Ireland's attractive tax system.
As of June 30,2011:
(All numbers in thousands)
- Net current assets - $1,161,014
- Total Liabilities - $959,548
- Liquidation Value - $201,466
Fully diluted shares: 8,796
Per share liquidation value of: $22.90
Current Price: $12.62
WLFC is an excellent opportunity to purchase a deep value play with a potential upside of 80%. I also excluded all property, plant and equipment in my computations, which is equal to $7.1 million, to provide a conservative figure. I normally like to discount PP&E by 50% when computing a more aggressive liquidation valuation.
WLFC is a profitable net/net opportunity with net income of $3.5 million the second quarter of this year. This is up compared to $1.9 million in net income Q2 last year. It is extremely rare to find a growing net/net with consistent profitability in a tough market. The Irish market is a great opportunity for WLFC to expand their business over the next few years. Their recent partnership with Mitsui & Co. is also a great opportunity for WLFC to increase their profits as they are able to leverage their resources. WLFC will also have additional access to low cost funding through the partnership. WLFC has been aggressive in finding opportunities to increase profits which has helped in maintaining their profitability in this tough environment.
WLFC has seen their utilization rates drop to 83% compared to 89% the preceding quarter and 84% in the second quarter of 2010. If the economy were to continue to slow they may see their utilization rates drop. WLFC said:
If the price of Brent Crude oil remains around $120 per barrel, or moves higher, it's likely to cause many airlines to return to their cash conservation mode. This is generally a good development for engine lessors who can lease-in engines so airlines can defer certain large expenditures like expensive engine overhauls which cost millions of dollars.
If crude oil will remain at elevated prices, the future prospects of WFLC may be affected. Higher fuel prices are more a negative for the industry than a positive, and carriers will look to decrease capacity than save money by leasing engines and aircraft. Jeff Smisek, President and CEO of United (UAL) said:
We are operating in a tepid economic environment with significant uncertainty here and abroad. We have responded appropriately raising fares in the face of high fuel cost and reducing our planned capacity to reflect the challenging environment that we face.
WLFC has a $285 million revolving credit facility that will expire in November 2012.
If WLFC were to fail in extending the revolving credit facility, they may be faced with liquidating assets at soft prices, which could be very damaging to the company.
Even given the risks mentioned, I believe WLFC provides investors a good opportunity to purchase a profitable business below liquidation value. The $8 area is an excellent level to build a position in order to build even more of a cushion, but there is still tremendous value at the current level. Investors who buy into cyclical businesses below liquidation values in a slow economy are handsomely rewarded when the economy starts to show signs of a recovery. Investors tend to chase sectors and markets also tend to award higher valuations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.