OEM Delays And Flaws Mix With Strong Demand And Order Book To Sway Future Finances

Key Takeaways

• Persistent OEM delays and manufacturing flaws have resulted in a demand surge for Air Lease's delivery slots, boosting lease rates and aircraft values.
  
• The company's significant order book ensures sustained growth and revenue from new leases at potentially higher rates, supported by limited market availability.
  
• Challenges like OEM delays, lease extensions, competition, and variable interest rates may affect revenue growth, profitability, and sustainability for Air Lease.

Catalysts

An aircraft leasing company, engages in the purchase and leasing of commercial jet aircraft to airlines worldwide.

• The persistent OEM delivery delays and manufacturing flaws have led to a shortage in commercial aircraft supply, driving strong demand for Air Lease's delivery slots and supporting higher lease rates and enhanced aircraft values. This dynamic is expected to positively impact future revenue growth as well as margins.
  
• The company's extensive $20 billion order book, with a significant proportion of aircraft deliveries scheduled through 2028, positions Air Lease favorably in the market as Boeing and Airbus have limited delivery positions available until the 2030s. This backlog not only ensures sustained growth but also enhances revenue through new lease placements at potentially higher rates.
  
• High utilization rates of the fleet at 100% and the company being 100% placed on its forward order book through 2025 and 96% through 2026 highlight efficient fleet management and operational performance. Such strong placement rates should contribute positively to stable and predictable revenue streams.
  
• The expected interest rate cuts by the Federal Reserve signal a potentially lower cost of borrowing, which can lead to improved net margins through decreased interest expenses. Moreover, a normalized yield curve shape could benefit funding costs, enhancing overall financial performance.
  
• The robust secondary market demand for Air Lease's aircraft, highlighted by a strong sales pipeline of $1.5 billion, indicates additional revenue sources from aircraft sales and trading activities. Healthy gains from sales contribute to earnings while optimizing the fleet in terms of age, type, and yield.

Assumptions

• Analysts are assuming Air Lease's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.2% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $512.2 million (and earnings per share of $4.14) by about August 2027, down from $520.5 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 15.3x on those 2027 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Trade Distributors industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Risks

• Ongoing OEM delivery delays and manufacturing flaws could slow the revenue growth due to fewer aircraft deliveries impacting the timing and volume of income from leasing activities.
  
• Lower end-of-lease revenues compared to prior years, as airlines continue extending the majority of their leases, may lead to a decrease in one-time income from payments associated with lease terminations impacting net margins.
  
• Reduction in aircraft sales gains due to the timing of individual aircraft sales closings in various packages may affect the expected revenue and profit margins from these transactions.
  
• Increased competition and supply in the leasing market, as mentioned indirectly through a healthy sales pipeline and robust demand for lease placements, could lead to pressure on lease rates and terms, potentially impacting revenue and margin sustainability.
  
• Variable interest rates and funding costs could impact profitability, especially if anticipated Fed rate cuts do not materialize as expected, influencing the cost of capital and net margins.

Valuation

• The analysts have a consensus price target of $55.83 for Air Lease based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $46.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.3 billion, earnings will come to $512.2 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $45.71, the analyst's price target of $55.83 is 18.1% 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.