Up 100%, Air Lease Stock Still Has Upside

Air Lease Corporation’s president Stevan F. Udvar-Hazy attends a press conference on January 28, … [+] 2011 in Colomiers during the first delivery of an A320 Airbus painted with the logo of New Zealand rugby national team, the All Blacks. Air Lease Corporation (ALC), the aircraft financing and leasing company, has taken delivery of its first brand new 320 aircraft directly ordered from Airbus and to be leased to and operated by Air New Zealand. AFP PHOTO/PASCAL PAVANI (Photo credit should read PASCAL PAVANI/AFP via Getty Images)

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After a 100% rally off the March bottom, Air Lease Stock (NYSE: AL) seems to still have some room to grow based on historic Price to Sales (P/S) multiples. Air Lease, a leading aircraft leasing company principally engaged in purchasing commercial aircraft and leasing them to its valued airline customers worldwide, has seen its stock rally from $15 to $31 off the recent bottom compared to the S&P which moved around 55%. The stock is leading the broader markets by a margin, as investor sentiment is positive toward the company due to its better than expected second-quarter performance – revenue growth of 11% y-o-y in Q2 and 10% y-o-y in first six months despite Covid-19 pandemic. However, the stock is still down 35% from levels seen in late 2019.

Air Lease’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as its valuation implies it has further to go.

Some of the rise over the last 2 years is justified by the roughly 33% growth seen in Air Lease’s revenues from FY 2017 to FY 2019. However, it didn’t translate into similar growth in net income which decreased from $756 million in 2017 to $575 million in 2019, mainly due to the enactment of the U.S Tax Act (one-time tax benefit of $146.6 million in 2017).

While the company has seen steady revenue growth over recent years, its P/S multiple has seen some decrease. A key factor behind the trend is the change in its net income margin figure from 52% to 30% over the last two years, with the figure likely to fall to 27% for the current year. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 36% Change in Air Lease Stock between 2017 and now? has the underlying numbers.

Air Lease’s P/S multiple has hovered around 3x, with the multiple slightly dropping from just above 3x in 2017 to just below it in 2019. While the company’s P/S is close to 2x now, there is an upside when the current P/S is compared to levels seen in the past years. P/S of around 3x at the end of 2019 and 2017.

So what’s the likely trigger and timing for further upside?

Air Lease Corporation AL is in the business of leasing aircrafts to airlines. Due to Covid-19 restrictions, the airline industry has suffered significant losses, which has reduced the company’s prospects of new business deals and exposes it to the risk of a possible default on lease payments. Although AL has delivered better than expected Q2 results leading to a 10% y-o-y increase in first-half revenues, they were mainly driven by growth in Aircraft sales, trading, and other segments (proceeds from the sale of aircrafts). On the flip side, as the air travel restrictions are removed and airline operations move toward normalcy, we expect AL stock to see some improvement. Our belief is further substantiated by Air Lease’s strong fundamentals and strong client base. Overall, we expect Air Lease to report slightly higher FY 2020 revenues than the previous year.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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