Sunday, May 9, 2010

AerCap Holdings Posting Solid Results - Interesting Comments from a European HQ Company

AerCap Holdings (AER) reported strong results before the market opened on Friday. Naturally with panic regarding Greece, they went widely unnoticed. In fact the stock continued its massive decline as investors feared contagion dampening the key European market.

AER remains the largest holding in the Growth Portfolio and returned to that title in the Opportunistic Portfolio as we added shares around $11.4 on Friday on the swoon.

Could contagion spread causing a Eurozone collapse...Yes... Will it happen... Unlikely. Greece is a completely different animal compared to the other PIIGS and very likely a one-off situation. AER has direct exposure of 2 planes to one customer in Greece. Some comments from the Earnings Conference Call from the CEO. Listen from roughly around the 23 minute point (or 4:30 of the Q&A section) and listen to the response regarding the Greece contagion fears.

  • CEO expects a repeat performance of Dubai and jokes about the 200 protesters on the Greece capital (later some estimated roughly 30K but we had the same thought that the news media was giving too much credence to what appeared to be a relatively small and mild protest)
  • too much focus on Roubini and others calling for the demise of the Euro. Doesn't see him and CNBC as a proxy for the real situation.
  • Customers being in the Eurozone are protected from having currency collapse/devaluation preventing them from rolling over debt in US denominations.
  • 1 customer with 2 planes - reinforces that its impossible for them to rollover debt if linked to a devaluing currency. Compares to Brazil crisis in the past. Good Brazilian operators couldn't service debt in collapse.
  • Lower Euro is good for Manufacturing sector which helps growth in Europe. (see my previous article on European growth. Also some have speculated that Germany has been dragging its feet in order to force down the Euro to help their largely Manufacturing base)
  • all assumes the EU prevents the contagion from spreading to a long term impact.
  • Now the big non-European note: seeing increased demand/rates for new narrowbody planes.
Back to the earnings which naturally takes a backseat for now. Remember these numbers include limited impacts from the merger with Genesis Lease which didn't take place until the very end of March. Adjusted earnings were $.55 and the stock is now at $11.9. Simple math suggests the stock is cheap now that they have a $2.2 runrate. One that should continue to grow as they integrate Genesis and expand airplanes and total assets.

  • First quarter 2010 net income was $34.4 million, compared with net income of $30.0 million for the same period in 2009. First quarter 2010 net income excluding the impact of the mark-to-market of interest rate caps and share-based compensation was $46.7 million, compared to net income of $31.5 million in the first quarter 2009 on the same basis.
  • First quarter 2010 basic and diluted earnings per share were $0.40. First quarter 2010 basic and diluted earnings per share excluding the impact of the mark-to-market of interest rate caps and share-based compensation were $0.55.
  • Net spread, the difference between basic lease rents and interest expense excluding the impact from the mark-to-market of interest rate caps, was $133.0 million in the first quarter of 2010 compared to $112.5 million in the first quarter of 2009, an increase of 18%. This measure reflects the increase in leasing income.
  • Basic lease rents for the first quarter of 2010 were $165.8 million, compared to $141.4 million for the same period in 2009, an increase of 17%. Total lease revenue (basic rents, maintenance rents and end-of-lease compensation) for the first quarter of 2010 was $175.4 million, compared to $161.2 million for the same period in 2009, an increase of 9%.
  • Sales revenue for the first quarter of 2010 was $182.4 million, compared to $41.7 million for the same period in 2009, and was generated from the sale of five aircraft, three engines and parts inventory.
  • Total revenue for the first quarter of 2010 was $364.0 million, compared to $208.5 million for the same period in 2009. The increase was mainly due to the increase in sales revenue and an increase in lease revenues from higher basic lease rents.
  • Committed purchases of aviation assets delivered or scheduled for delivery in 2010 are $2.2 billion, of which $0.9 billion closed in the first quarter of 2010.
  • Total assets were $8.7 billion at March 31, 2010, an increase of 50% over total assets of $5.8 billion at March 31, 2009. The Genesis Transaction accounted for $1.6 billion of the increase in total assets (please refer to "Financial position" for details). The remaining $1.3 billion increase was driven primarily by deliveries of forward order aircraft.

Disclosure: Long AER in Growth and Opportunistic Portfolios.

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