AL - Air Lease Corporation: Strong Buy Despite 3-I Pressure
2023-05-02 11:00:00 ET
Summary
- Air Lease Corporation beat estimates on top and bottom lines.
- My own adjustments to earnings and expenses show strong revenue growth but also strong cost growth.
- In the current demand and interest environment, airplane lessors have a superior positioning with significant upside for stock prices.
Air Lease Corporation (AL) reported its first quarter earnings after the bell on Monday. While going through the results, I saw that the stock was up 4.5% in after-hours trading. With the after-market stock price on one half of the screen and the results on the other half, my first impression was that the results were not great at all. In this report, I will be analyzing the results.
What I normally do is take the P&L statement and I start analyzing it to see where the company did well and where it didn't. However, if we compare the P&L table as reported by Air Lease, we also have some impact from the loss of flight equipment in Russia on revenues as well as earnings level. So, instead I will be adjusting the earnings according to my own corrections.
Air Lease Adjusted Revenues Show Strong Growth
The reported revenues suggest that revenues were up 6.6% driven by 9% higher rental revenues, but $39 million in lower sales and other revenues. However, last year in connection with the lease termination of Russian flight equipment, Air Lease recognized $41.7 million as lease termination revenues in its rental revenues and $17.9 million in forfeiture of security deposits.
| Adjusted Revenues in $ thousands |
| Q1 2023 |
| Q1 2022 |
| Change |
| Rental of flight equipment |
| 617,773 |
| 512,854 |
| 20.5% |
| Aircraft sales, trading and other |
| 18,369 |
| 12,207 |
| 50.5% |
| Total |
| 636,142 |
| 525,061 |
| 21.2% |
Air Lease Corporation Margin Improves Despite 3-I pressure.
| Adjusted Expenses in $ thousands |
| Common shareholder's equity in $ millions |
| $ 5,894.59 |
| Common shares outstanding in millions |
| 111.20 |
| Book value per share |
| $ 53.01 |
| Implied share price (5-year price-to-book) |
| $ 42.97 |
| Upside |
| 7% |
| Implied share price (5-year price-to-book (pre-pandemic)) |
| $ 50.38 |
| Upside |
| 25% |
Wall Street analysts have a 12-month price target of $54.88 on Air Lease stock. I processed the numbers and came to a book value per share of $53.01. Lessors tend to not trade at their fair value, it is a bit of an asymptotical value. So, instead I used the 5-year price-to-book and a 5-year pre-pandemic price-to-book which I deem to be more appropriate. This gives 25% upside from current prices.
Conclusion: Air Lease Corporation Remains A Strong Buy
When I looked at the unadjusted results, I wasn't particularly impressed with mid-single digits revenue growth. However, adjusting the number myself and not using the adjusted numbers that include some adjustments I don't quite agree with, I found over 20% improvement in revenues which is strong, but it was also paired with 17% higher costs driven by inflation, interest and inflation.
While these three items remain sticky for the foreseeable future, I also do believe that lessors are positioned well. Aircraft demand is high and so are airline debts making leasing a preferred way to recover and expand airline fleets giving lessors sufficient pricing powers on new lease agreements. It might not help the lessor on existing lease contracts but certainly will on new agreements.
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Air Lease Corporation: Strong Buy Despite 3-I Pressure