American International Group Inc (NYSE:AIG) Overhang Is One of Many Reasons For Einhorn Favorite: AerCap Holdings N.V. (NYSE:AER)
AerCap Holdings N.V. (NYSE:AER) is among the favorable picks for hedge fund manager David Einhorn of Greenlight Capital, who is betting that the company’s earnings and stock will rise over time. Among other things, Einhorn’s positive bet on AerCap has something to do with the overhang created by American International Group Inc (NYSE:AIG)’s stake in AerCap. The uncertainty over AIG’s interest in AerCap has made shares of the aircraft lessor cheaper in a generally expensive market.
Einhorn’s Greenlight Capital disclosed owning 1.76% of AerCap Holdings N.V. (NYSE:AER) as of the end of December 2014, which was valued at more than $145 million at that time.
The story behind the story
AIG’s 46% ownership in AerCap is a major overhang for investors considering long positions in the aircraft-leasing company. The overhang is also one of the reasons some investors like Einhorn are taking long positions in AerCap, primarily because the uncertainty has played a role in making the stock cheap.
AIG share sale registration
AerCap Holdings N.V. (NYSE:AER) recently filed a share sale registration for the 97.56 million shares by AIG. It is unclear how exactly AIG will handle its stake in AerCap. At the moment only a smaller portion of AIG’s stake in AerCap is unlocked and all the shares will be unlocked sometime in August.
According to the filing, AIG will be able to sell its shares in AerCap from time to time, which essentially means no commitment on timeline for when the sale would happen. The other thing is that AIG could simply be trying to evaluate its options regarding the stake in AerCap. Regards to what AIG eventually decides to do with its shares in AerCap, the share registration filing has created a major uncertainty and an opportunity for some long investors. There is a certain irony as the same logic was used for AIG’s stock while the government owned a large share, which depressed the price of the insurer in recent years.
Einhorn is one of the large money managers seizing the opportunity created by the AIG overhang to accumulate more shares in AerCap Holdings N.V. (NYSE:AER).
Reasons for the bullish case
Besides the issue of shares being made cheap because of the uncertainty surrounding AIG share registration, Einhorn is also bullish on AerCap because of other reasons:
A great deal: The fund manager believes that the decision to combine AerCap Holdings N.V. (NYSE:AER) with AIG’s aircraft lending unit, International Lease Finance Corp. (ILFC), was a wise move. The development has enabled AerCap to significantly increase its assets and raise its profile in aircraft leasing business. ILFC belonged to AIG as airplane leasing business, but AIG decided to give it out to AerCap for a 46% stake in the combined company as the insurance giant tried to streamline its operations. The acquisition of ILFC improves the opportunity for AerCap Holdings N.V. (NYSE:AER) to increase its earnings, subsequently raising stock price.
Management team: Despite great assets earned through combination with ILFC, Einhorn loves the management team behind AerCap, citing the company’s shareholder-friendly policy that includes culture of share buybacks.
Simple business model: Understanding the business model of AerCap doesn’t require a lot of work because the business is simple and beyond that it is secure. The company acquires airplanes and leases them to airlines across the world. It makes a lot of sense for airlines to rent planes than turn to banks for loans to make direct purchases.
Fewer risks: Any company has risks to address in its business and AerCap has its own, but Einhorn believes potential benefits in the company outweigh any near-term risks. The other inspiring thing about AerCap is that the company owns a growing fleet of aircrafts.
A closer look at AerCap
AerCap Holdings N.V. (NYSE:AER) is clearly up to something great, which explains why large money managers are making a bullish case for the stock.
- AerCap Holdings N.V. (NYSE:AER) signed lease deals for 67 aircrafts and delivered 32 aircrafts during 1Q2015.
- The company purchased a total of 17 new aircrafts during the quarter, with the mix including four Boeing 787-9s, six Boeing 737-800s and four Airbus A321-200s among others.
- AerCap owned or managed 1,640 aircrafts at the end of March 2015.
Most of the aircrafts that AerCap owns are commonly used commercial planes like Boeing 737 and Airbus 330. The company serves hundreds of airlines in 20 countries. AerCap posted EPS of $1.40 in 4Q2014, signaling an increase of 112%. Revenue also rose 380% to $1.34 billion. Both EPS and revenue for the quarter smashed consensus estimates that called for EPS and revenue of $1.30 and $1.26 billion, respectively.
AerCap Holdings N.V. (NYSE:AER) is looking to report net income of about $1 billion for 2015.
The company has more than $30 billion in long-term debt, but the favorable thing is that most of the debt will mature after 2021, with just about maturing before 2021 and about $400 million being due before 2018. AerCap could channel excess capital to repayment of debt so that it strengthens its balance sheet for long-term growth. The company had nearly $1.5 billion of cash and equivalents at the end of December quarter. That means that chances of AerCap defaulting on debt are remote given that the bulk of debt maturing falls behind 2021.
Favorable market conditions
Aircraft makers are overwhelmed with record orders for new planes. At the end of 2014, Boeing Co (NYSE:BA) disclosed $440 billion in commercial airline backlog, which is not only a huge number but also represent a significant increase of 18% compared to the previous year. On its part, Airbus also revealed $711 billion in backlog towards the end of 2014, representing 14% uptick.
What the massive backlogs mean is that demand for aircrafts is high, but the challenge is that those making the bookings have to wait several years between four and seven years before they can get their orders delivered. That leaves airlines facing greater pressure for capacity enhancement to either turn to used airplanes or rent planes from lessor such as AerCap Holdings N.V. (NYSE:AER).
It has always been wiser for airlines to rent planes because they are able to get favorable terms and also obtain fairly new planes. That puts AerCap Holdings N.V. (NYSE:AER) in a better position to ink more lease deals, especially given that most of its aircrafts have an average age of seven years.
The huge backlog at aircraft manufacturers can be explained by the growing interest among airlines to increase their capacity. There are a number of catalysts for larger capacity, namely increase international travelling and expanding profit margins thanks to lower fuel prices. Passenger growth this year is expected increase 7%, according to IATA estimates.
Large order backlogs at Boeing and Airbus indicate higher profits for AerCap Holdings N.V. (NYSE:AER). Aircraft leasing companies are able to make money and enjoy higher profit margins when the demand for planes is higher than supply and the opposite is also true.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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