Main Conference
12:05 David Einhorn, President, Greenlight Capital, Inc.: David Einhorn’s main fund lost 34% in 2018, gained 1.6% in 2017 and 8.4% in 2016 and lost 20.2% in 2015. The fund also gained 8% in 2014 and 19.1% in 2013.
Idea: Short Tesla Inc (TSLA), Long AerCap Holdings (AER) and short GATX Corporation (GATX)
Benchmark: Short position in S&P 500 ETF for Tesla and GATX short recommendations, and long position in S&P 500 ETF for AER recommendation
Background and Thesis: AerCap Holdings isn’t a new position for David Einhorn or tons of other value investors. The stock was dirt cheap 5 years ago according to these value investors and it is dirt cheap now. Yet its stock price barely moved even after the company bought back 36% of its outstanding shares. Here is what David Einhorn said about AER in his 2015 Q1 investor letter:
“AerCap Holdings (AER) is the largest publicly traded aircraft leasing company. Last year, it bought AIG’s aircraft leasing business (ILFC) at a bargain price in an extremely accretive deal, taking AER’s total fleet from around 300 planes to more than 1,300. The combined business will benefit from AER’s lower tax rate and funding costs, as well as SG&A and operating efficiencies. The deal also provided AER with ILFC’s attractivelypriced order book of next-generation planes. We bought our position at an average price of $41.02, which is less than 8x this year’s expected earnings. AER’s management is well incentivized, with senior executives receiving new restricted stock units in the ILFC deal, two-thirds of which will vest only after hitting performance targets. The company has been well managed and appears poised to grow earnings at a double-digit clip for the next several years.”
Here is what Einhorn said about AER earlier this year in his 2018 Q4 investor letter:
“AER leases new and mid-life airplanes to airlines globally. AER’s 99%+ utilization rate and sevenyear average remaining lease term support a high degree of earnings visibility. The company is well-managed and a strong capital allocator. Since we invested in the company in 2014, AER has disposed of about 400 planes to improve its fleet age, technology mix and customer concentration, while generating strong gains on sale consistent with conservative carrying values. During this period, the company has de-levered, bought back 35% of its shares outstanding and grown book value per share by 15% annually. Global traffic growth has averaged 6.5% annually over the last five years. The recent collapse in oil prices is a positive as it improves airline profitability, further stimulates global passenger traffic, and supports the values of used planes. Nonetheless, shares of AER fell about 25% in December. At current values, we would expect management to accelerate the sale of aircraft to redeploy into an even more aggressive share repurchase program”
In his Sohn Conference presentation, Einhorn compared airplane leasing and rail cars leasing businesses and concluded that airplane leasing business is a growing business with earning visibility and no maintenance expenses whereas the rail car leasing business peaked in 2016 with limited earning visibility and GATX has to bear the maintenance expenses. Einhorn said both companies have similar market shares, similar balance sheets, similar funding costs, and similar return on assets.
“All else being equal we prefer AerCap. Better returns, better industry fundamentals, better looking too. Turns out you can buy AerCap at 50% discount to GATX. AerCap trades at half the book value multiple and less than half the PE. A better industry and a better company in that industry, we think the market has this wrong. And the discount is nothing new. AerCap has traded at low multiples for a long time. The persistent discounted value creates an opportunity for AerCap that GATX doesn’t have. Mainly the ability to buy back stock at a big discount. And this is what AerCap has done. Since 2015 AerCap has repurchased $3.7 billion of stock reducing shares outstanding by 36%. The result is that AerCap has grown its book value per share by 17.7% per year while GATX has grown its book value per share by 6.8% per year. In fairness, without as much opportunity to buy back cheap stock GATX has paid a dividend of about 4.5% of its book value per year. But even taking that into account AerCap has been the better performer and we expect more,” summarized Einhorn his investment thesis.
I get where Einhorn is coming from. However, here is my problem with value stocks such as AerCap or General Motors. These companies seem to trade at low multiples but they aren’t really growing their earnings per share despite substantial share buybacks. AerCap had an earnings per share of about $5.50 more than 4 years ago. If the company was able to “grow earnings at a double-digit clip for the next several years” as Einhorn expected, its expected earnings per share for 2020 would have been $13.80 after taking into account the 36% reduction in share count. Unfortunately analysts have a consensus eps estimate of only $6.76 for 2020. This tells us that AerCap’s total earnings have been shrinking by nearly 5% per year since 2015 and we see some moderate eps growth only because AER has been aggressively buying back shares.
The bottom line is that Einhorn was wrong about AerCap growing its earnings at a double-digit clip. AerCap’s earnings (not earnings per share) were behaving like melting ice cubes. I wouldn’t touch this stock with a 10 foot pole before I understand why its earnings have been going down and whether this can be reversed. Einhorn should have explained this in his presentation instead of talking about “secular growth rates” in the airline industry. If AER can’t grow its earnings in a growing industry, I don’t think the market will reward it with a higher PE multiple. On the other hand GATX looks to be slightly overvalued. Analysts still expect a small improvement in its earnings next year though. I don’t think GATX is a great short candidate. Finally Tesla Inc (TSLA) is a battleground stock. I don’t think it is a good investment for the next 12 months but I won’t short it either. Each of these stocks’ reaction to Einhorn’s presentation was muted. Einhorn used to move large-cap stocks by 5-10% when he talked about them at investment conferences; GATX shares lost less than 2% after Einhorn’s presentation.
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