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AER - AerCap Holdings


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  • 5 months later...

anyone have any sense of how the supposed glut of used wide body aircraft might affect AER?  DAL CEO mentioned the glut in their conference call and subsequent interviews.  BA seems to dismiss the idea.  if there is in fact a glut, might that lead to lower leasing rates for AER and asset write downs?  it would also mean lower priced planes if AER wants to go shopping.

 

http://www.bloomberg.com/news/articles/2015-10-14/delta-bargain-hunt-puts-boeing-777-on-used-jet-shopping-list

 

"A glut of wide-body models coming off leases is creating an “aircraft bubble,” Chief Executive Officer Richard Anderson said Wednesday. While no deal is imminent, he said Delta repeatedly gets offers to add twin-aisle jetliners such as Boeing Co.’s 777-200 and Airbus Group SE’s A330-200.

 

“The aircraft market is going to be ripe for Delta over the course of the next 12 to 36 months,” Anderson said on a conference call after the airline’s third-quarter earnings report. “Prices are going to get lower.”

 

While that’s good news for Delta, Boeing tumbled after Anderson’s comments stirred concern that a used-jet surplus will crimp the planemaker’s ability to charge more for newer versions of the 777. The jet is one of Boeing’s main profit generators, according to Bloomberg Intelligence."

 

also this:

 

http://www.thestreet.com/story/13367317/1/delta-ceo-is-right-used-boeing-777-200s-are-worth-just-10-million-expert-says.html?puc=yahoo&cm_ven=YAHOO

 

"On Delta's Oct. 14 earnings call, Anderson said the used aircraft market is glutted with used Boeing 777s and becoming more so. Anderson said he sees "a huge bubble in excess-widebody airplanes around the world," creating a market for 10-year-old 777-200s at about $10 million."

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  • 1 month later...
  • 1 month later...

Doubled down last week. Concerns regarding Narrowbody "bubble" or high yield bonds are overblown IMO. Also, we are seeing the forced selling YTD from the HFs facing the redemption. Bill Ackman mentioned in his year-end letter that companies whose owners are principally index funds, ETFs, and other passive investors have much more stable and more “permanent” ownership bases, and appear, therefore, to suffer from much less volatility vs. those "Hedgie names." I think this applies to AER as well. The shares are trading at <4x right now. This is definitely not a dying company.

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Doubled down last week. Concerns regarding Narrowbody "bubble" or high yield bonds are overblown IMO. Also, we are seeing the forced selling YTD from the HFs facing the redemption. Bill Ackman mentioned in his year-end letter that companies whose owners are principally index funds, ETFs, and other passive investors have much more stable and more “permanent” ownership bases, and appear, therefore, to suffer from much less volatility vs. those "Hedgie names." I think this applies to AER as well. The shares are trading at <4x right now. This is definitely not a dying company.

 

I would have to think that very low oil, emerging market weakness, and currency issues will put a lot of pressure on appraised aircraft values.  Those appraised values are pretty closely tied to future leases and so one would think we will see lower returns on equity for the likes of all aircraft leasing stocks (they're all beaten up).  In some sense buying AER is like taking a normalized view on oil and emerging markets; that is balanced by a deep discount to book value but AER has always traded at a big discount to book.  Does anyone really think oil and emerging markets will normalize soon?  Hard to say but I'd say probably not...

 

Despite a lot of leverage, debt of AER/ILFC is fairly well protected and I'd expect some savings as they refinance a lot of ILFC notes.  So I don't get Einhorn's argument that the debt market is telling you to buy the equity.  You shouldn't expect a lot of weakness out of AER bonds (if you do, gtfo the equity) but there's so much leverage that small changes in overall value will give you these big swings to AER equity.  Despite falling back near the prices when the ILFC deal was announced it hasn't lost *that* much value.  So it isn't really trading like a dead business, it's just a super levered up business and these swings are perfectly normal especially when you consider the current environment.  Guys like Steven Udvar Hazy made (and then lost) a shit ton of money taking advantage of that leverage during a super bull cycle.

 

The current spread on the equity versus debt is the widest it's been since 2008 so if there was ever a time to buy AER it's probably now.    Book value is going to come down but I don't see it imploding anytime soon either.  The thing that worries me most is that everyone suddenly loves AER and maybe you've run out of marginal buyers of the stock.  Maybe it's the hedge fund panic selling but they were also the ones that helped drive it up past book value. 

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Those appraised values are pretty closely tied to future leases

 

Is that true? I don't think there's anything in the filings that says how lease rates are negotiated. I would've thought it would be determined by market forces more than anything else, and the airline industry is still looking quite healthy right now.

 

debt of AER/ILFC is fairly well protected

 

Is it actually well protected? For one, the debt is unsecured, and for another, if values of aircraft on AER's book and future lease rates go down, there would be less support for the credit as well would it not? Yet the bonds are still trading at close to par.

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The bondholders care less about the depreciation charges because it's cash coverage today and in the near future.  Equity holders care a lot more about that because it's a real cost to whatever value is left.  It takes some time for leases to roll off and catch up to market conditions but in the meantime it's pretty difficult to impair the bonds with an 80/20 mix of debt to equity.

 

In general if you have aircraft (or really any asset) values drop then leases will come down too.  It's not 1:1 but they won't be buying up aircraft for 50% less and leasing out at the same spreads as before.  Just think about being in the airliners shoes when there's a glut of used planes you can purchase at a big discount.

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  • 1 year later...
Full Year 2016 Financial Results

 

    Net income of $1,046.6 million, compared with $1,178.7 million for the same period in 2015. Diluted earnings per share of $5.52, compared with $5.72 for the same period in 2015.

    Net income and diluted earnings per share decreased due to various items, including sales of older aircraft during 2015 and 2016, which reduced average lease assets by approximately $1.6 billion. Diluted earnings per share was favorably impacted by the repurchase of 40.7 million shares for $1.7 billion during 2015 and 2016.

 

Fourth Quarter 2016 Financial Results

 

    Net income of $364.7 million, compared with $264.2 million for the same period in 2015. Diluted earnings per share of $2.01, compared with $1.33 for the same period in 2015.

    Net income and diluted earnings per share were driven by higher gains on sale and other non-recurring items, as well as lower AeroTurbine losses.

 

Book value increased 17% to $49,33, so its still trading a little bit below book. They have been quite smart in terms of capital allocation, selling old planes with gains and buying back shares below book value. They bought back ~12% of shares outstanding per their Q4 presentation.

 

Wondering what's the best way to value a business like this. AER has averaged 15% ROE during the past decade. There's been fair amount of discussion related to airline companies as Berkshire bought some lately. Wouldn't you rather own aircraft leasing business which basically has cash flows contracted for next several years with decent returns on equity as demonstrated in past? Just curious. And yes they use fair amount of leverage though.

 

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I would have to think that very low oil, emerging market weakness, and currency issues will put a lot of pressure on appraised aircraft values.  Those appraised values are pretty closely tied to future leases and so one would think we will see lower returns on equity for the likes of all aircraft leasing stocks (they're all beaten up).

 

How do currency issues and low oil impact appraised aircraft values. I would have thought that low oil prices would tend to increase airline profitability (due presumably to low jetfuel costs) and therefore demand for aircraft and thus increase appraised values. Also what is the currency issue..does a high us dollar reduce appraised values?

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12+% return on book value through core business

 

add additional value through historically reselling at premium (very good track record)

 

add additional value through opportunistic M&A

 

add additional value through share repurchases below book

 

in growth market - air travel

 

huge market - risk i can see is people getting in and driving pricing down, but market so big i have a tough time envisioning someone becoming the "Costco" of airplane leasing. 

 

high quality, but can't get away from fact that they are a levered yield biz / finance company (with everything that comes with it) so I wouldn't invest my entire net worth here.

 

good company, but a capital intensive biz so growth is slower - can expect 12-15% compounding owning this for a long time.

 

 

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  • 2 months later...

Started looking at this this week.

 

good company, good economics, good management, good value creation track record...trading at 7X earnings and less than 1X book.

 

Two main risks I see are:

1) high leverage: I think of it more like a financial company which makes me more comfortable with these debt levels, I understand they match their assets and liabilities (lease contracts with debt) and they seem to have sailed through the crisis pretty smoothly

2) residual risk: trying to get a better sense of how airplane prices fluctuate in this industry and how volatile they can be, seems more stable than the shipping industry for example where prices can vary 5-10X in cycle peak-trough. They've also been conservative on the carrying value in their books shown by their historical gains on asset disposals in the past 10 years or so.

 

Greenlight (Einhorn) and Dalal St (Pabrai) have it as a top holding.

 

What am I missing? From a first look, I would think his is a business that should trade above 12X or 1.5X book on the conservative side...Honestly surprised to find something like this in this market environment. If I can get a better idea of why it is being mispriced, I will take a plunge...or someone please convince me that's it's not.

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Started looking at this this week.

 

good company, good economics, good management, good value creation track record...trading at 7X earnings and less than 1X book.

 

Two main risks I see are:

1) high leverage: I think of it more like a financial company which makes me more comfortable with these debt levels, I understand they match their assets and liabilities (lease contracts with debt) and they seem to have sailed through the crisis pretty smoothly

2) residual risk: trying to get a better sense of how airplane prices fluctuate in this industry and how volatile they can be, seems more stable than the shipping industry for example where prices can vary 5-10X in cycle peak-trough. They've also been conservative on the carrying value in their books shown by their historical gains on asset disposals in the past 10 years or so.

 

Greenlight (Einhorn) and Dalal St (Pabrai) have it as a top holding.

 

What am I missing? From a first look, I would think his is a business that should trade above 12X or 1.5X book on the conservative side...Honestly surprised to find something like this in this market environment. If I can get a better idea of why it is being mispriced, I will take a plunge...or someone please convince me that's it's not.

 

widebody aircraft values, new aircraft deferrals, airlines capacity discipline, etc.

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  • 3 weeks later...

Hey guys, just published this article in SeekingAlpha after researching a more about the company. Just initiated a position this week.

 

https://seekingalpha.com/article/4076111-aercap-buy-one-plane-get-one-free

 

please let me know your thoughts

 

thanks!

 

No offense, but the guy in the comments section was more interesting than that article. It doesn't really come across like you know in-depth about the company or the aviation industry.

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