However, the question is, which stocks in this industry will provide the best returns?
Investment thesis
Aircastle Limited (NYSE:AYR) was the first company to report its quarterly results on May 7. The company reported a crushing earnings beat. It reported 1Q earnings of $0.40 per share, topping the estimate of $0.26. The beat was a result of better than expected revenue (maintenance and other revenue) which covered for slightly higher than expected interest and other costs.
The guidance for 2013 asset acquisitions, that could meet or exceed last year’s $850 million in investments, is consistent with comments provided during Aircastle Limited (NYSE:AYR)’s investor day and reflects management’s optimism in aircraft demand trends. However, the revenue guidance for 2Q came in softer than anticipated, partially as a result of lower than expected lease rate factor (LRF) but also on higher amortization of lease discounts and incentives. (A lease rate factor is the lease payment as a percent of the total cost of the leased equipment or software. Stated another way, if you multiply the lease rate factor by the cost of the leased equipment or software, the result equals the periodic lease payment.)
As a result of weak guidance, the Street has reduced its 2Q estimates. Barclays reduced their 2Q EPS estimate to $0.33 from $0.41. However, with the 1Q beat, the FY13 EPS estimate was raised to $1.70 from $1.60. The FY14 EPS estimate has been reduced trivially to $1.95 from $2.00, leaving the price target of $19 unchanged (almost 20% upside).
Aircastle Limited (NYSE:AYR) is expected to expand its earnings. The company also has opportunities for value-creating capital deployment. Despite a favorable company and industry outlook, shares have suffered on a relative basis. An upside to the stock price is expected as the relative valuation gaps close. Also, the company’s dividend of 4.24% is under-appreciated.
The second in line was AerCap Holdings N.V. (NYSE:AER) that reported the earnings on May 7.The company reported 1Q earnings of $0.60 per share, topping the estimate of $0.47. The beat was a result of better than expected sales revenue combined with lower than anticipated costs.
Management sounded more optimistic and bullish than the previous quarter. However, the 2013 guidance remained unchanged (which was earlier considered to be conservative when it was first provided last quarter).
As a result, Barclays’ 2Q13 EPS estimate remains unchanged at $0.54. However with the 1Q beat, the FY13 EPS estimate was raised to $2.20 from $2.10 and the FY14 EPS estimate was raised to $2.25 from $2.20. Barclays holds a price target of $18 (which is almost 9% up from current levels).
Overall, improving industry fundamentals and sentiment should aid AerCap Holdings N.V. (NYSE:AER)’s stock as well as other aircraft leasing stocks. However, better relative returns are expected at other aircraft lessors that provide more growth or income.
Air Lease Corp (NYSE:AL) reported its quarterly results on May 9. The company’s results came in weaker than the industry’s standards. The company reported 1Q earnings of $0.38 per share, slightly less than the estimate of $0.42.
The difference was a result of softer than expected revenue. However, that doesn’t mean that I am bearish on the stock. Air Lease Corp (NYSE:AL)’s story appears to be developing as expected, with committed growth (as well as some room for incremental growth, progress towards investment grade credit rating (with Kroll issuing an A- rating on May 8) and continued access to the financing markets.
Barclays did not change its 2Q13 EPS estimate of $0.43, FY14 EPS estimate of $2.40, and a price target of $38 (27% upside from current levels).
Holistically stating, Aircastle Limited (NYSE:AYR) is well positioned within an industry that is exhibiting improving fundamentals and sentiment. Some valuable growth is expected, and as a result, solid earnings growth could be seen at Aircastle Limited (NYSE:AYR) in the years ahead.
My Foolish take
As already noted, the overall aircraft leasing industry’s fundamentals are improving. However, in this situation, we need to make the optimal choice so that we get the best return on our investment. In this situation, we can conclude that those companies offering relatively high growth (like Air Lease) or attractive income combined with some growth (like Aircastle Limited (NYSE:AYR)) would provide better relative returns as compared to the other companies in the industry like AerCap Holdings N.V. (NYSE:AER).
The article This Industry Is Flying: Which Stocks to Buy? originally appeared on Fool.com and is written by Zain Abbas.
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