Aircastle Seems Like A Decent Speculative Buy

| About: Aircastle Limited (AYR)

There's an ongoing quest for yield in the markets. This quest for yield is so powerful that in some instances, like PDL BioPharma (NASDAQ:PDLI) (described here) or PIMCO Global StocksPLUS & Income Fund (NYSE:PGP) (described here), it even produces what seem like irrationalities. In this environment, if one can find high yielding stocks that are mostly reasonable economically, there's a good chance that they'll head up over time.

Aircastle Limited (NYSE:AYR) is one such stock. Aircastle buys and leases planes or invests in debt backed by aircraft. Its aircraft portfolio consists of 144 aircrafts, and is leased to 65 lessees over 36 different countries. This means Aircastle's activity is reasonably diversified geographically, thus a bit less vulnerable to economic conditions than it would otherwise be.

Presently, Aircastle shows as a pretty decent business trading for 0.6 times book value. Its ROE isn't incredible at 8%, but that's also a function of the high book value AYR carries. The dividend yield on AYR stands at a full 4.8%, given its latest $0.15 quarterly dividend. This dividend meant a payout ratio of 33%, so seems very sustainable at this point.

Aircastle also trades at a forward 2012 P/E of 8.8 times, cheap even in a cheap market. Aircastle has been beating earnings estimates consistently and looks likely to continue to do so. Aircastle's yearly earnings estimates have climbed a little, which is also a good sign.

Main risk

It would seem that what keeps Aircastle at this low valuation in spite of seemingly good fundamentals, is its exposure to Europe. The following table from the most recent 10-Q tells the story:

Click to enlarge

Even in the light of this, the fears seem overblown, particularly because it seems possible for AYR to relocate aircraft to other parts of the world, if Europe becomes too much of a problem. Anyway, for AYR's activity, the main risk is that of a significant economic slowdown that might lead to aircraft being idled. Although some economic slowdown does seem likely at this point, it does not look to be profound enough to lead to such an outcome.


Another consideration is that Aircastle's fleet, at 11.1 years, is older than most of its competitors. Air Lease (NYSE:AL) is the best lessor in that regard, with an average age of just 3.6 years, but the stock is more expensive in some ways and doesn't carry an yield which would kill the speculative angle. Fly Leasing (NYSE:FLY) could be an alternative, although more expensive in most metrics, it does have a rather newer fleet at 8.7 years and carries a 6.3% yield, which would help the speculative angle. For more information on the industry as well as some of the players, this Bank of America presentation can be useful.


Aircastle seems like a decent way to profit from the present quest for yield, while buying a reasonably priced equity with a lot going for it. The main risk is that the present economic slowdown turns nasty enough to have an impact on AYR's business. In spite of the risk, I believe Aircastle is more likely to head up than down, and it might make sense to buy dips on the stock.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AYR, FLY over the next 72 hours.