Key Takeaways

Expansion into future technology assets positions the company for growth with more valuable, in-demand assets, potentially enhancing revenue and margins.
Strategic use of MRO facilities and financial innovations enhances operational efficiency, cost savings, and financial flexibility, positively influencing earnings.
Increasing interest rates and market fluctuations pose risks to margins and profitability, while technological and regulatory challenges could affect asset value and earnings stability.

Catalysts

About Willis Lease Finance

Operates as a lessor and servicer of commercial aircraft and aircraft engines worldwide.What are the underlying business or industry changes driving this perspective?

The acquisition of nearly $1 billion in engines and aircraft, with a substantial portion being future technology assets like LEAP and GTF engines, positions the company for growth with more valuable and in-demand assets, potentially driving higher revenue and margins.
The signing of the new constant thrust deal for over 20 CFM56-7B engines suggests strong demand and efficient asset utilization, which could enhance revenue streams and operational efficiency, ultimately boosting earnings.
The strategy of leveraging its MRO facilities to manage the maintenance needs of engines and utilizing disassembled parts for repairs presents opportunities for cost savings and higher net margins by optimizing parts usage and reducing turnaround times.
The expansion and modernization of the portfolio to 53% future technology assets as of the end of the year should lead to greater lease revenues, as these newer engines are anticipated to be more desirable in the market.
The refinancing and expansion of the company’s credit facilities, along with other innovative financing techniques like JOLCO and engine warehouse financings, provide financial flexibility that supports potential growth and leverage management, impacting earnings positively.

Willis Lease Finance Earnings and Revenue Growth

Willis Lease Finance Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Willis Lease Finance's revenue will grow by 5.0% annually over the next 3 years.
Analysts assume that profit margins will shrink from 18.7% today to 16.0% in 3 years time.
Analysts expect earnings to reach $103.3 million (and earnings per share of $13.95) by about March 2028, down from $104.4 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 10.3x today. This future PE is lower than the current PE for the US Trade Distributors industry at 18.5x.
Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Willis Lease Finance Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Increasing interest rates could raise finance costs significantly, which may negatively impact Willis Lease Finance's margins and overall profitability.
The complex nature of future technology assets, including LEAP and GTF engines, carries substantial maintenance challenges and associated risks that could affect long-term earnings and operational costs.
Dependence on the availability and flexibility in securing and utilizing test cell slots could limit repair capabilities, affecting the MRO operations' efficiency and profitability, which could indirectly impact earnings.
Exposure to fluctuations in spare engine market values, coupled with challenges in originating transaction deals due to market scarcity, might reduce revenue growth and lead to financial underperformance.
Regulatory or industry economic shifts may impact asset valuations and impairments, creating risks that could lead to unexpected write-downs impacting net margins and earnings stability.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $218.0 for Willis Lease Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $644.8 million, earnings will come to $103.3 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 8.5%.
Given the current share price of $162.97, the analyst price target of $218.0 is 25.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Expanding Into LEAP And GTF Engines Will Modernize Portfolio But May Face Maintenance Risks

Expanding Into LEAP And GTF Engines Will Modernize Portfolio But May Face Maintenance Risks