Four Stock Plays on Air Travel Abroad

All three are fairly new companies, but the oldest is Aircastle(AYR Quote), which debuted in August of last year. As of year-end, AYR had a fleet of 69 planes leased to airlines in countries as disparate as Iceland, Turkey and Sri Lanka, among many others.

Like all of these companies, AYR has a lot of debt, just over $2 billion compared to its $2.25 billion market cap. It yields 7.7% but earns less than the dividend it pays out (this is not unique in this group of names) and last week it filed for a secondary offering, which knocked the stock down 5%.

AYR has a 0.386 correlation to the S&P 500.

Genesis Lease(GLS Quote) has slightly fewer jets, 43. GLS is the smallest company of the three, with an $896 million market cap, but has comparatively large debt load of $1.5 billion. It yields 7.6%. Again, the company's earnings don't quite cover the dividend payment. This is a new company and, candidly, none of its numbers look very good.

However, General Electric (GE Quote) owns an 11% stake. While it is tough to say what kind of stock GLS will be, GE didn't invest because it thought GLS is a bad company.

GLS has a 0.398 correlation to the S&P 500.

The stock I find most promising is AerCap Holdings (AER Quote). It has the largest fleet of the bunch leased to 88 clients in just about every country you can think of (the company's Web site lists all of its clients).

Like the others, it has a lot of debt: $3 billion, compared with a market cap of $2 billion. It trades at a much more conservative valuation of two times sales, compared with eight times sales for AYR and five times for GLS.

AER has a 0.442 correlation to the S&P 500.

The reason I think AER is promising is that it pays no dividend and has no plans to pay a dividend. Aircraft leasing is a complicated and capital-intensive business. AER benefits by not having to return more than it earns to shareholders as a dividend the way that AYR and GLS do. Simply put, AER appears to be a more conservative company.

All three stocks are volatile -- really volatile.

Turbulent Skies Aircraft leasing stocks are volatile

Click here for larger image.

The market panic that occurred this summer was a great stress test; it showed just how rough things can get for heavily indebted companies when fixed-income market seize up. It stands to reason that debt-intensive companies could be in real trouble if they cannot access interim financing. Whether this was perception or reality, all three stocks dropped 25%-30% in about six weeks (bottoming out on Aug. 16).

So far, they have come back about half way. Interestingly, AER, my favorite, has lagged on the way back after missing estimates for second-quarter earnings by a penny.

All three stocks seem to be very well liked by the few analysts who cover them. Earnings and revenue estimates all look to be quite healthy as well. What makes investing in this space difficult is the fact that these companies are starting out with so much leverage, but the expected growth of air travel in the markets where they operate are very compelling.

It's estimated at 6%-11% a year compared with below 5% in the U.S. The dynamic between debt and growth should make for continued volatility as the space matures.

Given this volatility, I would suggest anyone interested in any of the names take a very small position.