A Shot of Confidence

 | Dec 13, 2012 | 7:00 AM EST  | Comments
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Ron Wainshal, CEO of Aircastle (AYR), bought 5,000 shares of the company's stock on Dec. 11 at an average price of $12.13 per share -- his first Aircastle purchase since August 2010, according to our database. That lengthy period makes this purchase a significant one, as does the 50% climb in the shares since that time. Wainshal now owns close to 600,000 shares directly.

Aircastle is primarily a lessor of commercial aircraft, and has a market capitalization of $840 million. Last quarter revenue climbed 22% year over year, though there was only a 9% increase in lease-rental sales. Net income would have been 40% to 45% higher, but a large impairment expense left the company in the red for the quarter.

A similar story emerges from the first nine months of 2012: Sales rose nicely, and when we strip out the effects of aircraft impairment and an extraordinary gain last year, earnings appear to be significantly higher as well. Specifically, if we add back impairments at the same level as they were last year, we get $85 million in net income in the first three quarters of the year, which annualizes at close to $1.50 per share -- as opposed to only $0.05 per share, if we use the actual impairment numbers.

Of course, there's no guarantee that Aircastle won't need to write down the value of its aircraft further, and there's also no guarantee that growth will continue. But, given the current stock price, at just above $12, the business appears to be doing quite well. For 2013, analyst expectations call for EPS of $1.70. With depreciation in one of Aircastle's largest expenses, cash flow from operations is high -- more than $250 million between January and September of this year.

Part of this cash gets returned to investors -- another attractive feature of the stock. Aircastle recently increased its quarterly dividend payment to $0.165 per share, bringing its yield to 5.5%. As might be expected from a description of the company's business, Aircastle's prospects are closely tied to the overall economy -- the stock's beta is 1.8. However, based on our previous analysis, we wouldn't interpret the CEO's purchase as reflecting bullishness on the overall economy. Instead, there seems to be a credible enough thesis just looking at Aircastle itself.

It's also important to note that the company is highly leveraged: The market cap of $840 million is a fairly small portion of an enterprise value of close to $4 billion. Because of the leverage and beta, this stock would not make a good pick for defensive-minded investors, even despite the dividend yield. However, there is a case to be made here on income, and even on value.

For comparison, AerCap Holdings (AER) is a larger peer with a market cap of $1.6 billion and enterprise value of $7.5 billion. It carries trailing and forward price-to-earnings ratios of 8x and 6x, respectively, though its revenue was essentially flat in the third quarter vs. the same period last year. So the industry seems to be trading at discounted prices. AerCap's earnings multiples are a bit lower than those of Aircastle, even if we adjust for the latter's special charges, but AerCap's business does not seem to be performing as well.

It's possible that either way to play the industry would work, but we think many investors would like the yield at Aircastle. Given the CEO's confidence in the stock, as well, we would give that company a narrow edge here. If the company does get a clean quarter and deliver strong earnings, it will likely prove undervalued at the current price, and we think that it's worth considering at these levels.

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