AL Stock Study (7-17-23)

Posted by Mark on September 15, 2023 at 06:24 | Last modified: July 17, 2023 13:20

I recently did a stock study on Air Lease Corp. (AL) with a closing price of $42.45. The original study is here.

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 past decade, this medium-size company has grown sales 11.1% per year. Earnings have grown 11.3% per year from ’13-’21. The company posts 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 peak in ’19 (excluding ’17 when EPS spikes ~100% due to TCJA). PTPM is higher than peer and industry averages by increasing from 34.2% in ’13 to 40.9% in ’16 before heading down to 25.9% in ’21 for a last-5-year mean (excluding ’22) of 33.2%.

ROE goes 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 mean (excluding ’22) of 9.1%. This is slightly better than peer averages and mostly lower than the industry.

Debt-to-Capital averages 71.8% over the last five years, which is lower than peer and industry averages but still uncomfortably high. M* lists Interest Coverage as 12.7 and Quick Ratio as 0.83. FCF has been negative since at least ’20.

Despite the red flags, M Ramirez writes in this 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.

With regard to sales growth:

• CNN Business projects 17.4% YOY and 14.2% per year for ’23 and ’22-’24, respectively (based on 7 analysts).
• YF projects YOY 17.6% and 12.5% for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY 15.2% and 14.1% for ’23 and ’24, respectively (3).
• CFRA projects growth of 18.6% YOY and 14.6% per year for ’23 and ’22-’24, respectively (5).
• M* gives an ACE of 16.7% per year for the next two years.

I am extrapolating out to five years with a forecast lower than the entire range at 12.0%.

With regard to EPS growth:

• CNN Business projects 16.9% and 18.2% per year for ’21-’23 and ’21-’24 (’22 is negative, as mentioned above), respectively (based on 7 analysts), along with 5-year annualized growth of 14.2%.
• MarketWatch projects 20.9% YOY and 15.9% per year for ’24 and ’23-’25, respectively (7 analysts).
• Nasdaq.com projects 27.3% YOY and 26.1% per year for ’24 and ’23-’25 [4, 4, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized growth of 14.2%.
• YF projects 21.0% YOY growth for ’24 (6) along with 5-year annualized growth of 26.2%.
• Zacks projects 27.5% YOY for ’24 (4) along with 5-year annualized growth of 14.1%.
• Value Line provides ACE of 14.6% and 18.7% per year for ’21-’23 and ’21-’24 (3) along with 14.2%/year for 5 years.
• CFRA projects growth of 32.9% and 27.0% per year for ’21-’23 and ’21-’24, respectively (1).

I am forecasting 14.0% growth—below the long-term-estimate range (mean of four: 17.2%)—and using $4.50/share in ’22 as mentioned above. This results in high EPS of $8.66/share.

In order to project from ’22 on the website, I need to override to the trendline at $0.30 with a 96.0% growth rate to end up at $8.63/share.

My Forecast High P/E is 8.0. From ’13-’21, high P/E ranges from 7.2 (’17) to 18.6 (’13) with a last-5-year mean of 11.7. The last-5-year-mean average P/E is 9.5. I am forecasting near the bottom of the range (only ’17 is lower).

My Forecast Low P/E is 6.0. From ’13-’21, low P/E ranges from 5.0 in ’17 to 14.6 in ’14 with a last-5-year mean of 7.4. I am forecasting near the bottom of the range.

My Low Stock Price Forecast (LSPF) is the default $27.00 based on $4.50/share initial value. This is 36.4% less than the previous close and 9.4% less than the 2022 low.

Over the past decade, Payout Ratio has ranged from 4.8% (’17) to 18.6% (’21) with a last-5-year mean of 13.1% (2022 NMF excluded). I am forecasting conservatively at 5.0%.

These inputs land AL in the HOLD zone with a U/D ratio of 1.7. Total Annualized Return (TAR) is 10.8%.

PAR (using Forecast Average—not High—P/E) of 8.0% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 185 studies over the past 90 days (my study and 80 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.1%, 11.1%, 11.0, 6.0, and 9.0%, respectively. I am only lower on Forecast High P/E, but I’m using the EPS workaround as described above.

MS high/low EPS is $6.96/$3.96 vs. my $8.63/$4.50 (per share). As evidenced by MS mean EPS growth of 32.3%, others have also dealt with significant confusion in figuring out how to deal with negative EPS in ’22. This obscures my ability to determine MOS because MS data are highly scattered.

MS LSPF of $26.20 implies a Forecast Low P/E of 6.6 vs. the above-stated 6.0. MS LSPF is 10.3% greater than the default value of $3.96/share * 6.0 = $23.76, which results in more aggressive zoning. MS LSPF is 3.0% less than mine, however [a rare occurrence].

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. PEG is 0.64 per Zacks while Relative Value is 1.08 per M* data. These suggest the stock to be undervalued and overvalued, respectively.

I would look to re-evaluate AL under $37/share.