AerCap Flags a New $500 Million Share Repurchase – Buyback Wednesdays

AerCap is the global leader in aviation leasing with a fleet value of  $34.7 billion. There is a notable upward trend in aircraft leasing, with approximately 48% of the global commercial aircraft under lease agreements. The company had a record third quarter in terms of leasing extension rates, which were as high as 80%!

AerCap Holdings N.V. (AER): $62.12

Market Cap: $12.93B

EV: $57.93B

Key Insights

• AerCap has an attractive portfolio of over 1,700 aircraft, approximately 1,000 engines and over 300 helicopters, and an order book of 380 of the most in-demand aircraft in the world.
• New technology aircraft comprise 69% of its aircraft fleet.
• The global air travel industry has rebounded post-pandemic, providing strong demand for AerCap’s leases.
• Leased aircraft have tripled over the past 20 years.
• AerCap repurchased approximately 20 million shares and leased, purchased and sold 219 assets in Q3 2023.
• The positive impact of share repurchases as well as the strong underlying performance of the operational business, has led to annualized book value per share growth of 18% over the last six quarters.
• The company revised its full-year earnings guidance upwards twice this year.

Source: AerCap 

AerCap, headquartered in Dublin, Ireland, specializes in offering a diverse portfolio of assets for lease, including narrow-body and widebody aircraft, regional jets, freighters, engines, and helicopters. The company’s core strategy revolves around acquiring sought-after aviation assets, ensuring efficient financing, and employing interest rate hedging when deemed advantageous. It became the largest aviation leasing company in the world following the acquisition of International Lease Finance Corporation (ILFC) in 2014 and GE Capital Aviation Services (GECAS) from General Electric in 2021.

The company’s operations faced disruptions in the last three years, attributed to a combination of factors. These include the halt in air travel caused by the COVID-19 pandemic and challenges arising from the Russia-Ukraine conflict, which hindered the company’s ability to repossess airplanes leased to Russian airlines.

Global Travel Trends

Global air travel has experienced a rapid resurgence following the COVID-19 pandemic. Nevertheless, worldwide travel remains 12% below the levels seen in 2019. High aircraft lease extension rates of around 80% this quarter clearly indicate demand is growing. Widebody lease extension rates were over 90%.

Source: AerCap (Earnings Presentation)

With manufacturers not being able to deliver promptly and airlines facing delays in receiving their expected deliveries, there is a rush to secure available leases to fulfill the increasing demand for travel. This surge in demand is highly beneficial for AerCap’s business. Additionally, airlines are also willing to purchase older aircraft because acquiring new ones has become a challenging task.

AerCap Leases

AerCap employs a methodical approach to lease management, ensuring that it avoids excessive single-year re-leasing risks. When the company acquires an aircraft, it typically secures financing through debt, with maturities spanning from 5 to 12 years, aligning with leases of similar durations. This strategy enables a balanced correlation between lease income and debt repayments.

Valuation

AerCap shares are trading at a substantial discount to the sector median with forward P/E of 6.57 and forward EV/EBITDA of 8.46. This undervaluation is likely due to concerns about higher interest rates increasing its financing costs.

Profitability and Growth

AerCap shows robust profitability with a high gross margin of 55.54% and strong net income margin of 33.77%. The gross margin is in line with its peer Air Lease Corporation (AL) but the net margin is much higher. The company’s return on equity of 15.86% is double that of AL’s return on equity of 7.78%.

Estimated double-digit forward revenue growth of 14.5% for the company looks impressive.

Cash Flow and Debt

AerCap has $2.66 billion in cash and short-term investments as of September 2023, which is double compared to what it had in September 2022. The company’s current assets are also twice its current liabilities.

Long-term debt has increased considerably from $28.5 billion in March 2021 to $47.5 billion in September 2023. This is mainly because of the GECAS acquisition in 2021 and the fact that AerCap has been acquiring aircraft.

AerCap’s 6-K filing stated that, as of September 30, 2023, the company’s existing sources of liquidity were sufficient to operate its business and cover approximately 1.7x of its debt maturities and capital requirements for the next 12 months.

Source: AerCap (Investors)

Share Repurchases

After pausing buybacks due to the pandemic, the leasing giant repurchased a significant number of shares this year, the highest it has done in any year so far. It has reduced its share count by 35.7 million shares during the course of this year and it is notable that it financed these repurchases without borrowing money. The shares were repurchased at an average price of $58.03, a discount of around 26% to current book value. These repurchases have allowed the company to mitigate the impact of the overhang from GE sales which has reduced its stake in AerCap from 45% at the beginning of the year to approximately 14% today. AerCap also repurchased approximately 28 million shares from GE for a total of around $1.6 billion.

Source: AerCap (Earnings Presentation)

On October 27, 2023, the Board announced another $500 million share repurchase program. This takes the total authorization to $2.65 billion which is equivalent to 20% of its current market cap.

Management

Aengus Kelly has been leading AerCap as its CEO for more than 12 years. With experience in the aviation leasing industry, he has held different roles in the company since 2005. Mr. Kelly has played a significant role in improving the company’s performance, with the stock price rising by a remarkable 191% over the last decade and revenue increasing from $957 million to $7.48 billion over the same period.

In April 2017, Mr. Peter Juhas was appointed as the Chief Financial Officer after serving as the Deputy CFO since September 2015. He was instrumental in the sale of ILFC to AerCap and also led the company’s IPO in 2006.

The company has a strong management team that has helped it withstand various challenges over the decade and make sound decisions in terms of acquisitions and also aircraft purchases and leasing.

Q3 2023 Results

Q3 was a record quarter for AerCap in terms of GAAP earnings, adjusted EPS and buybacks.

• Revenue rose by 10% year over year to $1.89 billion, beating estimates by $10 million. This was driven by renewing leases at higher rates and maintaining strong lease utilization levels.
• The company generated net income of $1.1 billion in the third quarter and earnings per share of $4.86. This includes $646 million of proceeds from the settlement of certain insurance claims related to aircraft formerly on lease to Russia’s Aeroflot Group.
• Book value per share was $78.28, an increase of approximately 21% from the prior-year quarter.
• Cost of debt was 3.5%, a slight increase from 3.4% last quarter.

Through the first nine months of this year, AerCap sold over $2.1 billion worth of assets. Full-year sales is expected to be between $2.5 billion and $3 billion. Following the strong performance for the first three quarters, Aercap has again updated its earnings guidance for the full year, raising it to $9.50 in adjusted earnings, excluding fourth-quarter gains on sale.

Source: AerCap (Earnings Presentation)

Source: AerCap (Earnings Presentation)

Risks

• Demand for aircraft depends on the demand for air travel. A global recession could cause air travel to decline, leading to airline bankruptcies and lease defaults.
• Lower demand can also reduce the fleet’s residual value – the remaining value of the aircraft at the end of a lease.
• With a huge amount of debt on the balance sheet, higher interest rates will cause financing costs to increase further.
• AerCap generally cannot increase the lease rates with respect to a particular aircraft until the expiration of the lease, even if the market is able to bear the increased lease rates. If it is unable to do so at a rate similar to or greater than its cost of financing, the company’s net spread will contract, leading to a decline in profitability.

Bottom Line

AerCap has been buying back its stock aggressively and reducing its share count. Increased demand for new planes, elevated re-leasing extension rates, good resale value for used aircraft and significant future revenue growth provide a positive outlook for the company. The company manages to balance its debt and assets well, maintaining a debt-to-equity ratio of 2.5.

The low valuation reflects the market’s pessimism that the good times will not continue for this cyclical business. If you hold a divergent opinion about where AerCap is in its cycle, the stock could be a strong buy here.

Welcome to edition 83 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

As third-quarter earnings reports come in, the number of buyback announcements has increased significantly. Sixteen companies declared buybacks, compared to fifteen the previous week which also saw an increase in number due to reported earnings.

Top 5 Stock Buyback Announcements 

1. Polaris Inc. (PII): $86.42

On October 26, 2023, the Board of Directors of this powersports company approved a new $1 billion share repurchase program, equal to around 20.8% of its market cap at announcement.

2. Phillips 66  (PSX): $114.07

 On October 18, 2023, the Board of Directors of this energy products manufacturer authorized an additional $5 billion stock repurchase program, equal to around 10% of its market cap at announcement.

3. Marathon Petroleum Corporation (MPC): $151.25

On October 25, 2023, the Board of Directors of this petroleum company approved an additional $5 billion stock repurchase program, equal to around 8.5% of its market cap at announcement.

4. Align Technology, Inc. (ALGN): $184.59

On October 24, 2023, the Board of Directors of this global medical device company announced that it has entered into a new accelerated stock repurchase agreement to repurchase $250 million of Align’s common stock under Align’s $1.0 billion stock repurchase program. This represents around 6.6% of its market cap at announcement.

5. Republic Services, Inc. (RSG): $148.49

On October 26, 2023, the Board of Directors of this waste management company announced that it has approved a new share repurchase program for up to $3 billion, equal to around 6.5% of its market cap at announcement.

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