According to market outlooks published by Boeing (BA) and Airbus, the world's two largest aircraft manufacturers, worldwide demand for passenger and cargo aircraft over the next 20 years will require nearly 30,000 new aircraft valued at over $4 Trillion. The main drivers for this extensive growth will be the replacement of older, inefficient aircraft as well as substantial growth in emerging markets. In China alone passenger growth in the next five years is forecast to double levels the seen in 2009 and new commercial airports are being built at the rate of 10 a year.
Established airlines and startups looking to capitalize on this growth will undoubtedly be making acquisitions either through direct lending or by engaging in operating leases from a third-party. Due to the large acquisition costs of modern commercial aircraft, leasing has become an attractive way for many companies to maintain a competitive fleet while minimizing capital expenditures. Even well-financed operators have realized the benefits of leasing a portion of their fleet as they shuffle route structures and experiment with new markets. Today 30 percent of commercial aircraft are leased, the highest rate in history, which represents a 700 percent increase over the last 20 years.
AerCap Holdings N.V. (AER) is an independent aircraft leasing company that currently owns 256 aircraft valued at over $9 billion and leases to over 100 companies in 50 different countries. Based in the Netherlands, AerCap 's primary holdings are the Boeing 737NG and Airbus A320, the two most popular narrow body aircraft in the world. Since 2005 they have tripled their fleet size and increased their lease income to $1.1 billion. Aercap's average 6 year lease rate is 98 percent, and their 5 year Return on Assets is a sector leading 3.1 percent. In 2012 AerCap became the only independent aircraft leasing firm in the world rated as investment grade by Standard & Poor's, due to their conservative capital structure.
AerCap currently trades at approximately 6 times forward earnings which is a discount to many of its peers such as Air Lease Corporation (AL), AirCastle Limited (AYR) and Fly Leasing Limited (FLY), and a discount to the average aerospace sector. Trailing EV/EBITDA is 13.70. Using a conservative Discounted Cash Flow analysis, I calculated the intrinsic value at $15.20 per share (11% earnings growth over the next 5 years). Book value is currently just over $15/share. The stock currently trades below both of these valuations.
The last few years have been trying for all companies engaged in the operation of aircraft and AerCap was no exception. 2012 revenues are down 5.6 % year-over-year due to lease rate decreases on some older A320 and B757 aircraft as well as the repossession of two aircraft from Kingfisher Airlines. Lease rates have since stabilized and on the whole are expected to grow between 2 and 5 percent in the coming year, partially due to 30 new aircraft deliveries in the next 15 month.
Long term risks to revenues include rising interest rates and small foreign currency loses as exchange rates fluctuate against the US dollar.
Even using conservative metrics, AerCap represents a great value for those looking to capitalize on the forecast worldwide growth in air travel. The stock is attractive at current levels, though I'd like to see it pullback to under $12 before I would consider it a strong buy. The company has recently announced a very positive share buyback program, though many investors feel the announcement of even a modest dividend may attract new money and spur more share appreciation. Ultimately I trust that AerCap's focused and opportunistic management will properly allocate these funds in order to continue their impressive fleet growth for the next several years.