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Buy Thesis on AYR

|Includes: Aircastle Limited (AYR)

Aircastle is a company I own shares in due to it showing up in a small cap value screen. It is strong on price to earnings (c. 9x), price to book and price to cashflow. Inaddition the 4% dividend yield is a positive. I would expect about $1 of earnings this year, which should yield a price around $15, assuming a reversion to a more normalized p/e for the sector. I also anticipate returns on any sort of lending activity to increase over the next couple of years, based on supply and demand - the supply of financing has been sharply curtailed and therefore returns on financing should rise, per basic economic theory.

The concerns on AYR are weaknesses and bankruptcies in the airline sector, which seem to be abating, but which may hit leasing with a slight lag, and potential bank covenant breach in the first half of next year, which I think is less likely to happen than others perhaps expect given the financial soundness of the company. Plus a recent covenant test appeared to be a non-event for them, and I doubt their ratios will change materially next year. There's also the risk of the company doing an overpriced acquisition or otherwise wasting capital, but I don't see the risk with AYR as being that different to any other stock.

I don't have any sort of catalyst for this stock and as a small cap without much attention, it may remain cheap, but I'll be happy to hold it for it's 4% yield. I'd sell it above $16 at which point I'd consider it fair value, if it fell below $7 I'd consider adding more, but I don't have sufficient conviction to have it as a significant (7%+) part of my portfolio.

Disclosure: Long AYR at time of writing

Disclosure: Long AYR at the time of writing