Is AerCap Stock A Buy?

Is AerCap Stock A Buy? You might be a bit gun-shy when it comes to anything in the airline or aviation sector – and with good reason.

The coronavirus pandemic brought air travel to a screeching halt. And with that systemic shock, the vast majority of airline stocks plummeted to never-before-seen lows.

So, with countries and economies slowly reopening, you might be wondering about aviation stocks. Considering that AerCap is the global leader in the aviation world, is AER a good investment?

AerCap Is The Global Leader In Aircraft Leasing

AerCap leads the world in the leasing of aircrafts. It also provides financing for the aviation sector as a whole.

The company has over $45 billion in assets and is funded by a capital structure that produces long-term earnings and generates healthy cash flow.

AerCap owns more commercial airliners than any other company in the world. The company is also the most active trader of aircrafts. With these airliners, AerCap supplies customers with fleet solutions around the world.

When it comes to investment strategies, leasing aircraft has become increasingly popular. As airlines seek to keep their debt-to-income ratio low, it just makes sense to lease their airbuses rather than owning them.

Firms across Asia especially are taking advantage of the growth in this sector. In fact, analysts estimate that Asia could overtake the United States within the next couple decades as the world’s leading plane market. Will major players like Boeing bow out, only time will tell?

Is AerCap Stock A Buy?

AerCap generates billions in revenues but it’s also has massive debt levels, almost $30 billion of long-term debt.

For a company generating ballpark $5 billion in revenue, this is a serious liability overhang.

Unlike the big tech companies that plummeted in March 2020 and then roared back to new highs, AerCap has struggled to gain traction, and it’s no surprise why.

With the airline industry as a whole at a standstill, even leasing companies like AerCap feel the pinch. 

Most recently airlines have claimed they need another bailout so the stormy weather isn’t yet in the rearview mirror for airlines and companies that sell to them.

Risks of Investing in AerCap

The global pandemic drove the demand for air travel down to never-before-seen lows – a stark drop of 95% made investors scramble for their “sell” buttons.

Airlines suddenly needed far fewer aircraft. In March, investors panicked and sent shares of aircraft leasing companies, such as AerCap, plummeting.

By May, AerCap sent the message that these panic-stricken sells were a knee-jerk overreaction – Wall Street agreed. AerCap’s Q1 earnings far surpassed what analysts expected.

Although the company’s rents and margin of net interest were down from the previous year, AerCap didn’t collapse, as many analysts and investors feared.

Even with this better news, AerCap isn’t twiddling its thumbs. The company reduced its capital expenditures for the year by $2.3 billion. It reworked new plane delivery schedules – all planes delivered between now and December of 2021 are already spoken for.

The company even deferred delivery of 37 planes that would have been delivered throughout 2021 and 2022 to later in the decade. This gives AerCap a bit more flexibility should travel not rebound as fast as is hoped.

These deferrals will obviously hurt the company’s revenue for 2020, but the end hope is that it helps several airline companies avoid bankruptcy in upcoming fiscal quarters.

Who Competes With AerCap?

AerCap’s closest relative competitors include Avolon and Air Lease Corporation.

AerCap was founded in 1973. The company has enjoyed funding of $1.3 billion and has a revenue of $4.9 billion. AerCap employs 398 people. Aengus “Gus” Kelly is CEO.

Avolon was founded in 2010. Avolon was acquired by Bohai Leasing in January of 2016 at which time Avolon’s stock was delisted on the NYSE. The company has seen funding of $5 billion and has an annual revenue of $1 billion. Avolon employs 250 people. CEO is Domhnal Slattery.

Air Lease Corporation was also founded in 2010. The company has raised funding of $3 billion with an annual revenue of $2.4 billion. Air Lease Company employs 97 people. President and CEO is John Plueger.

Will AerCap’s Competitors Beat It?

Which of these two financial leasing companies’ stock is superior? Let’s take a look at aspects such as ownership, ratings, valuation, risk, and profitability for AerCap and Air Lease Company.

Ownership

Around 85% of AerCap’s shares are institutionally held, as opposed to around 93% of Air Lease shares. And around 7% of Air Lease’s shares are held by insiders. Institutional ownership of shares is a good indication that a company is on the cusp of long-term growth.

Ratings

Analyst ratings place AerCap stock at a targeted price of $46.75 in competition with Air Lease’s target price of $38.50.AerCap’s potential upside is nearly 63% as opposed to a potential upside of around 23% for Air Lease.

Given these upside ratings, analysts believe AerCap is the much better investment.

Valuation

Here we compare the top-line revenue of these two leasing companies, their per-share earnings, and valuation.

AerCap has both higher revenue and greater earnings than its rival, Air Lease. AerCap is also trading a lower price-to-earnings ratio, meaning AerCap is, at time of press, the more affordable between the two.

Risk

AerCap’s beta, 2.1, illustrates a share price that has 110% greater volatility than the S&P 500, whereas Air Lease’s beta is 2.01, or 101% greater volatility than the S&P. A greater volatility means greater risk posed to the investor.

Profitability

Leasing companies hold high debt-to-equity ratios – it’s just part of the game. AerCap’s 80% debt-to-equity is only slightly beaten by Air Lease’s 75%.

These companies rely on their income from airline companies to settle their own debts to remain operational.

While Air Lease looks better on paper, AerCap is still a heavy hitter that will be hard to beat.

Is AerCap Stock A Good Buy? – The Bottom Line

Investors seek value, and seeking out the value in an investment is the best way to find awesome stocks regardless of the market. Who wouldn’t want those under the radar stocks – no pun intended – that offer tantalizing discounts when it comes to actual value?

In the near-term, AerCap may struggle and that’s already reflected in its share price. Its heavy debt load will act as a drag on earnings, and the overall industry slowdown will negatively affect its prospects. 

When the industry bounces back as a whole, airline leasing should continue to be an attractive cash-flow generating business that benefits AerCap.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.