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We came across a bullish thesis on AerCap Holdings N.V. (NYSE:AER) on ValueInvestorsClub by johny88. In this article, we will summarize the bulls’ thesis on AER. The company’s shares were trading at $100.00 when this thesis was published, vs. the closing price of $95.75 on Apr 14.
A wide aerial view of an airport and commercial aircrafts in the sky.
AER engages in the lease, financing, sale, and management of commercial flight equipment in the United States, China, and internationally. It is the world’s largest lessor for passenger aircraft.
The demand for air travel has surpassed 2019 levels creating an increase in demand for passenger aircraft. However, regulatory issues and supply chain challenges have limited the number of aircraft deliveries by companies like Airbus and Boeing. These companies have an expected annual delivery of 1,100 per year, which is much lower than the annual supply of 1,600 in 2018. It is estimated that the production shortfall stands at 10% of the global fleet. This gap is unlikely to be plugged in due to the complexity of integrating thousands of suppliers. Many argue that there may be an oversupply in the near future, prompting lease rates to fall and reducing salvage value. However, this would work against OEMs that derive the bulk of their revenue from maintenance work. A faster supply of aircraft would imply accelerated retirement of aircraft and less scope for maintenance work. Therefore, OEMs would ensure better lease rates and better salvage value for AER by keeping a check on the supply.
AER is also set to benefit from a higher lease rate due to favorable demand-supply dynamics. The rate on A321neo is 20% higher than what it was in 2019. The tenure of lease agreements has also increased with contracts extending up to 12 years. In most cases, these agreements take 1-3 years to materialize and are yet to reflect in the profitability of AER. Even if the interest rates were to drop, the existing contracts would still be executed based on a higher rate than the rate negotiated 1-2 years ago.
In a conservative scenario, AER should earn $2.15 billion from 2025-2029, representing 60% of its market cap. This also reflects an earnings yield of 12%, making the valuation extremely attractive. An additional upside can be expected from higher lease rates and better sales with higher margins. The yield should also increase if the excess capital is deployed towards M&A deals and share buybacks.
While we acknowledge the potential of AER as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AER but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
