AL Stock Study (3-13-23)
Posted by Mark on March 23, 2023 at 06:32 | Last modified: March 23, 2023 15:21I recently did a stock study on Air Lease Corp. (AL) with a closing price of $39.25.
Value Line writes:
> Air Lease Corp. engages in the purchase and leasing of
> commercial jet transport aircraft to airlines worldwide.
> It sells aircraft from its operating lease portfolio to
> third parties, including other leasing companies,
> financial services companies, and airlines.
Over the last 10 years, this medium-sized company has grown sales 11.1% per year. Earnings have grown 11.3% per year from ’13-’21. The company posted a loss of $1.24/share in ’22 due to aircraft in Russia. From the 2022 10-K:
> In response to the sanctions, in March 2022 we terminated
> all of our leasing activities in Russia, consisting of 24
> aircraft in our owned fleet, eight aircraft in our managed
> fleet and the leasing activity relating to 29 aircraft that
> that had not yet delivered from our orderbook, all of which
> have been subsequently placed. In the first quarter of
> 2022, we also canceled five aircraft in our orderbook that
> were slated for delivery in Russia.
>
> While we or the respective managed platform maintain title
> to the aircraft, we determined that it is unlikely we or
> they will regain possession of the aircraft that are
> detained in Russia. As a result, we recorded a write-off of
> our interests in our owned and managed aircraft that are
> detained in Russia, totaling approximately $802.4 million
> for the three months ended March 31, 2022. The 21 aircraft
> that remained in Russia were removed from our fleet as of
> March 31, 2022.
Sans write-off, I calculate ’22 earnings at $5.67/share rather than -$1.24. For purposes of 5-year projections below, I will lean conservatively and discount by just over 20% to get $4.50/share as my initial value.
Excluding ’22, sales are up and mostly straight while earnings peaked in ’19 (excluding ’17 when EPS was up ~100% YOY due to TCJA) and have been falling slightly ever since. PTPM went from 34.2% in ’13 to 40.9% in ’16 and has fallen every year since to 25.9% in ’21 for a last-5-year average (excluding ’22) of 33.2%, which is higher than peer and industry averages.
ROE went from 7.5% in ’13 to 11.4% in ’18 (’17 excluded due to TCJA) before falling to 6.2% in ’21 for a last-5-year average (excluding ’22) of 9.1%. This is slightly better than peer averages and mostly lower than the industry.
Debt-to-Capital has averaged 71.8% over the last five years, which is lower than peer and industry averages but still uncomfortably high. M* lists Interest Coverage as an ominous -1.61: first time I have seen a negative number on this metric. Current and Quick Ratio are ~0.9 and FCF has been negative since at least ’20.
Despite these red flags, M Ramirez writes in a SA article:
> The main negative point for the market is that Air Lease is
> a finance company and as such needs a lot of debt to operate
> on a large scale with the assets it holds. Leverage is
> currently high (about 2.5 debt/equity), although in no case
> is the amount of debt greater than the total value of the
> company’s assets… although a priori the debt seems exorbitant,
> the company finances more than 95% of the debt at a fixed rate
> (…close to 3%), which, together with the high predictability
> of its cash flows, makes it practically impossible for the
> company to go bankrupt. The company could stop aircraft
> purchases for 5 years and with the cash flows repay half of
> the debt without increasing rents to the lessees.
I forecast long-term annualized sales growth of 11% based on the following:
- CNN Business projects 13% YOY and 16.1% per year for ’23 and ’22-’24, respectively (based on 8 analysts).
- YF projects YOY 14.4% and 16.8% for ’23 and ’24, respectively (5 analysts).
- Zacks projects YOY 13.8% and 17.3% for ’23 and ’24, respectively (3).
- CFRA projects growth of 15.2% YOY and 16% per year for ’23 and ’22-’24, respectively (5).
- M* gives an ACE of 16.8% per year for the next two years.
I am extrapolating out to five years with a forecast lower than all estimates except ’22-’24 CNN Business.
I forecast long-term annualized EPS growth of 96.4% based on the following:
- CNN Business projects 14% YOY and 19.7% per year for ’23 and ’22-’24, respectively (based on 8 analysts), along with 5-year annualized growth of 22.7%.
- MarketWatch projects 19.7% and 17% per year for ’22-’24 and ’22-’25, respectively (8 analysts).
- Nasdaq.com projects 13.1% YOY and 20.1% per year for ’23 and ’22-’24, respectively (4 and 3 analysts for ’23 and ’24).
- Seeking Alpha projects 4-year annualized growth of 24.4%.
- YF projects 24.1% YOY growth for ’23 (5) along with 5-year annualized growth of 26.2%.
- Zacks projects 27.5% YOY for ’23 (3) along with 5-year annualized growth of 22.7%.
- Value Line projects 16.5% annualized from ’21 to ’23/’24 and offers a 5-year-annualized ACE of 16.9%.
- CFRA projects growth of 18% YOY and 26.8% per year for ’23 and ’22-’24, respectively (1).
I am forecasting 15% growth—below the entire range of five long-term estimates (mean 22.5%)—and using $4.50/share in ’22 (see above) as my base. This results in future EPS of $9.04/share.
In order to project from ’22 on the website, I need to recalculate based on the trendline at $0.30 and enter a 96.4% growth rate to end up at $8.72/share (98% growth rate overshoots to $9.08/share; we’ll just say “user error” as the reason this didn’t end up as 97%, but it’s even more conservative this way).
My Forecast High P/E is 8. From ’13-’21, high P/E ranged from 7.2 (’17) to 18.6 (’13) with a last-5-year average of 11.7. I am forecasting near the bottom of the range (only the ’17 value is lower).
My Forecast Low P/E is 6. Excluding the downside outlier in ’20 (1.9), from ’15-’21 low P/E ranged from 5.0 (’17) to 14.6 (’14) with a last-5-year average of 7.4. I am forecasting near the bottom (using the aforementioned $4.50/share rather than TTM).
My Low Stock Price Forecast is $27. This is 6 * $4.50: 31.2% below the previous close and 9.4% less than the 52-week low.
Over the last 10 years, Payout Ratio has ranged from 4.8% (’17) to 18.6% (’21) with a last-5-year average of 13.1% (2022’s NMF excluded). I am forecasting conservatively at 5%.
These inputs land AL in the HOLD zone with an U/D ratio of 2.5. The Total Annualized Return (TAR) is 12.8%.
Total annualized return (TAR) of 12.8% is acceptable for a medium-sized company, but PAR (using Forecast Average, not High, P/E) is lower at 9.9%. Can I believe in the former?
To answer this, I compare my inputs with Member Sentiment (MS). Out of 226 studies over the past 90 days [my own and 20 other studies with high EPS > $40/share excluded (18 of these were 4 digits or more)], projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 11.7%, 31.9%, 11.6, 7.7, and 8.2%, respectively. I’m lower on P/E range and Payout Ratio. My sales growth forecast is the same. The 31.9% projected EPS growth along with the MS [average] high EPS of $4.65 suggest most people are not acknowledging ’22 as a one-time loss since it alone is less than ’22 EPS sans write-off. Low EPS is another head-scratcher as many studies have negative values. From my perspective, recording a loss on the Russian airplane fleet is the epitome of an extraordinary item; how can that possibly be used to represent zero growth five years hence short of the write-off being repeated each and every year?
Based on these observations, I perceive a robust margin of safety in this study and would be a buyer under $37/share.