Aircastle's (AYR) share value has gone up by 16% in a year. The company leases and sells commercial aircrafts to airlines all over the world. Aircastle has remained a top performer in the industry since a long time: the company's revenue growth has averaged 10.6% over the past three years, while the industry has seen its top line increase at a far lesser rate of 1.4%. With the macro environment proving favourable for Aircastle, this trend is expected to sustain ahead.
In this article, I will evaluate the company's financial strength by reviewing its performance in the latest quarter. Later, I will discuss factors to highlight the future potential of the organization.
Fourth Quarter
Aircastle reported its latest quarterly result last week. The company achieved revenue growth of 24% as the top-line figure surged to $238 million. The year-over-year increase came on the back of higher maintenance charges which arose due to the early return of several aircrafts from Russian airlines. The company also gained through positive industry conditions which led lease rentals to grow by $9 million in the quarter.
Aircastle's EBITDA, excluding amortization of lease discounts and incentive payments, also went up by 19% owing to a larger top line. The gains would've come higher had non-cash impairment charges related to five older aircrafts not affected total profitability in a negative manner.
Nonetheless, the company attained significant leverage from lowering its interest rate which led the earnings to come at 99 cents per share. The figure not only beat the analysts' estimate of 43 cents by a wide margin but also came 46% above the profit reported in 2014. Looking ahead, the earnings momentum is expected to sustain owing to the reasons discussed below.
Market Expansion
Aircastle's demand is linked to growth in passenger volume which pushes airlines to buy or lease more aircrafts. Fortunately, the demand for air travel is forecast to grow at a CAGR of 5.4% over the next three years. By 2017, the number of passengers is expected to rise to 3.91 billion from 930 million in 2012. The growth will prevail due to an increase in trade activity within the Asian and Middle Eastern markets. The reason behind this is that the governments in these regions will adapt to favorable policies targeted to boost economic growth. This, in turn, will push the movement of individuals and provide a reason for airlines to expand their aircraft fleets.
While the current macro environment will provide a tailwind to every player in the market, several factors indicate that Aircastle will stand out as a winner: first, the company has been fast on acquiring more aircrafts at costs that will boost margins in the future; it recently bought 21 aircrafts for $750 million. Most of these planes are less than five years old and are now on long-term leases with profitable airline companies. Therefore, they will provide a stable revenue stream over the industry's growth period.
Secondly, the company has taken steps to prevent any damage arising out of deteriorating business conditions and weakening of dollar in the Russian economy. Since the beginning of fourth quarter, Aircastle has reduced its aircraft fleet in Russia by 70%. One of the three remaining planes was recently sold at a small profit while another one has already been leased. The last one is currently marketed and is expected to go on lease by the end of June.
Bottom Line
Industry growth, increasing backlog of airplanes, and reduced exposure in Russia have led the analysts to believe that Aircastle's earnings will grow by 10% to $2.20 per share in 2016. The growth in earnings will ensure that the stock-price trend sustains ahead.
Aircastle will pay a dividend of 22 cents to investors on record by 6th March. The payment will earn an attractive yield of 3.6%. Furthermore, the company remains undervalued as its forward PE of 10.9x is below the industry average of 17.5x. In addition, Aircastle's price to book multiple of 1.1x is 62% lower than the industry average of 2.9x. The fundamentals as well as the earnings forecast have led 10 brokers to value the company's stock at $28 per share, which reveals that Aircastle is undervalued by 21%. I believe the target price will be achieved by the end of this year owing to the factors discussed above. Therefore, Aircastle holds a buy rating.
