Air Lease Stock Price as of Publication: $43 per share. 

Air Lease buys planes from aircraft OEMs such as Airbus and Boeing and leases them to airlines that don't want to pay huge upfront costs for these multi-million dollar vehicles. To pay for its purchases, Air Lease raises debt at low-interest rates. Also, the company sells aircraft from its leasing portfolio to third parties and provides management fleet services to airlines all over the world.

The company was founded by Steven Hazy in 2010, the current executive chairman of the company and a pioneer in the aircraft leasing business. 

The company's main competitors are Aircrastle Ltd. (AYR) and Fly Leasing Ltd. (FLY). Air Lease is the biggest and the strongest among its competitors. The company's profit margin is 20% which is higher than Aircastle’s (2nd biggest) figure of 18%. Also, Air Lease has a much higher growth rate despite it having nearly 2x Aircastle’s revenues. Yet, both stocks are trading at an equal PE (after adjusting for tax benefits due to Tax Reform). 

Air Lease stock dropped from $48 to $43 per share after interest rates rose and tax reform kicked in. Although the company got a huge benefit on the effective tax rate front (35% ETR in 2016 vs an expected ETR of 22% in 2018), it got a hit on the interest deductibility front. The new tax laws limits interest-tax deductibility to 30% of EBITDA from 2018 to 2022, and 30% of EBIT afterward. Air Lease is still in the safe spot till 2022 as its interest expense to EBITDA is at just 18.5% today. 

However, after 2022, the interest expense would be higher as the company depends regularly on debt offerings to pay for its purchases, at the same time, the denominator is lower; EBIT is always lower than EBITDA. 

This means that Air Lease may surpass the 30% interest expense to EBIT limit which translates to a higher interest expense on the issued debt following 2022. 

We believe that the market is worrying about a very long-term issue. The company’s interest expense (17% of leasing revenues), while it is the biggest expense after depreciation expense, it remains low considering the company’s healthy profit margin of 20%. Also, 85% of AL’s debt is at a fixed rate, which makes the company immune from rate hikes for the next 3-4 years. 

More Growth Ahead

AL’s growth is slowing down as it’s getting bigger. However, it’s still safe to assume that the company can easily grow between 10% and 20% annually for the next 3 years. In 2017, the company’s revenues increased only 8% due to delayed deliveries from aircraft OEMs. However, the company expects that it will receive 44 and 81 aircraft in 2018 and 2019, respectively. The company owned 244 aircraft at the end of 2017. 

If that took place, the company’s revenues should increase between 14% and 18% in 2018, and more than 20% in 2019 as 100% and 95% of the company’s orders are already booked by its customers in 2018 and 2019, respectively. 

We also believe that orders from customers should increase in the coming 2 years as oil prices are going higher. Higher oil prices gives incentives to airlines to lease aircraft(s) instead of buying them as profits are lower which makes the ability to pay upfront for planes also lower.

Solid Business Model

AL is a growth stock that is trading at 11x earnings. Not only the company is growing, but its total addressable market is growing too. The Travel & Tourism industry is growing much faster than the global economy and airports/airlines are getting a huge chunk of the industry’s revenues. AL’s customers are airlines that don’t have enough bargaining power with OEMs, so they would depend on AL which would give them some discounts (AL has bargaining power with OEMs due to its large orders). Its customers also don’t want (or can’t) to pay huge upfront costs for buying aircraft (or issue debt), so they would find AL as their best choice. This makes AL’s business model solid, and strongly correlated to the growth of emerging markets (45% of the company’s revenues are from Asia). 

Moreover, AL’s $1.45 billion in annual revenues are all generated by just 70 employees. That's why SG&A expenses account for just 7% of revenues. And guess what? The company doesn't need more employees to grow. For instance, over the last 5 years, when revenues grew at a 21% CAGR, SG&A expenses grew at a 3% CAGR. 

In its latest CC, management stated each employee can manage 5 to 6 aircraft. Managing aircraft is a low-revenue business but these revenues are enough to pay for employee salaries and bonuses. So, in fact, every employee is covering his/her annual expenses from the tiniest segment of the company. 

It's also worth mentioning that Air Lease has a ~10% stake in two VIEs named "Blackbird 1 and 2"  that are majority owned by third parties (Blackbird 2 is newly formed). These VIEs are similar to the yield cos of the solar industry in which assets of the parent companies are passed down to them. Air Lease uses these VIEs as a proxy to lease planes to customers that the parent company is forbidden to lease to by credit rating agencies due to customer concentration risks. VIEs are a great way for Air Lease to raise money as the company sells its planes to them and get a significant amount of cash. 

Last but not least, AL's management team has deep expertise in the business. Steven Hazy is one of the most respected executives in the air leasing industry. His discipline and self-confidence, which can be told by how he handles conference calls, are well admired. He also has many connections with several airlines due to his previous work as a chairman and CEO of International Lease Group (a direct competitor to Air Lease) which was sold to AIG in 1990 for $1.3 billion. Steven Hazy's net worth stands at $3.8 billion which is strongly correlated to AL’s market cap which gives the chairman a respectable skin in the game. 

The bottom line: Air Lease is a growth stock with a value price tag, the company has an exemplary management team with deep expertise and operating in a high-margin industry while having double digits growth rates. At 1.08x tangible book value and a 10% average growth in tangible book value, we believe that the upside is significant for the stock.