Air Lease (AL, Financial) is among the fastest growing aircraft leasing companies and I have remained bullish on the stock in the last 1-2 years. With Air Lease reporting its first quarter 2015 results on May 7, I maintain my positive view on the stock and I expect further stock upside from current levels. This article discusses the reasons to be bullish on Air Lease for the remainder of 2015 and for the long-term.
For 1Q15, Air Lease reported an increase of 13% in revenue from $246 million to $278 million. The adjusted diluted EPS increased by 7% to $0.61 as compared to $0.57 in 1Q14. While the increase in revenue and EPS was relatively moderate, Air Lease increased its fleet size by 10 aircraft to 223 as of March 31, with the fleet having an average age of just 3.5 years and a robust weighted average lease term of 7.1 years. The lease terms ensures high revenue visibility in the coming years, and is one of the major reasons for being bullish on the stock from a long-term perspective.
The second reason for being bullish on Air Lease is an excellent geographical diversification. As of March 31, the company had 42.5% of its fleet (% of net book value) in Asia. In my view, this is a big positive as Asia is the high growth region for the coming decade and the big demand for aircraft leasing is likely to come from Asia. With strong presence in the region, Air Lease is already well positioned to continue on its strong growth trajectory.
Another important point to analyze for Air Lease is the company’s debt position and financial flexibility. As of March 2015, Air Lease had a total debt of $6.9 billion. However, the net book value of the company’s aircraft fleet was $9.5 billion and this implies that the company’s assets cover the debt and there is scope for further leveraging. In addition to this factor, I must add that Air Lease reported an EBITDA of $259 million for 1Q15. Considering the cash interest payment of $62 million for the quarter, Air Lease has a high EBITDA interest coverage ratio. Therefore, high debt is not a point of concern considering the fact that the company has a remaining lease term of 7.1 years.
Besides these factors, Air Lease has a robust pipeline of new aircraft for delivery for the next 10 years. This will ensure that strong growth continues for the company. The important point to note here is that most of the aircraft deliveries for the next 3-4 years are already leased on long-term contract with airline companies. Therefore, leverage for financing the delivery of new aircraft is not an issue as debt servicing will be ensures through lease rentals.
I must point out here that Air Lease has moved higher by 13.7% in YTD15. However, I believe that the rally is not over for the stock and stable cash flows along with the delivery of new aircraft will ensure that strong growth momentum sustains for Air Lease in the coming quarters and years. Therefore, I remain positive on the stock and investors can consider exposure to the stock even at current levels with a 3-5 year investment horizon.
