During periods of extreme market stress, cases of mistaken corporate identity are rife. Any company in an industry that has the barest similarities with a genuinely out-of-favor sector can find its shares under heavy distribution for no good reason. For my money, a relatively new industry -- the leasing of commercial jet aircraft -- is in that category right now.
For that reason, I want to call your attention to
( GLS), which is based in Ireland. I spoke at length with its chief executive last week, and believe I have a good grasp of the story.
For reasons unknown both to him and to me, the company has been lumped with companies that are in trouble because of the issuance or holding of asset-backed securities. This is surprising, considering that Genesis gathered just over $1 billion in its initial public offering earlier this year, and it also has a $1 billion credit line.
It uses this money to simply buy young, popular planes and then rents them out on long-term contacts to airlines around the world.
It has securitized part of its holdings, but the note is a throwback to bygone days of straightforward banking -- it has no lower, mezzanine or super-senior tranches. So far as I can tell, there is nothing spooky about it whatsoever.
Cleared for Takeoff
Genesis' cash flows are strong and unencumbered, it has the backing of
massive aircraft leasing program -- from which it was spun out last year -- and it does not have a high concentration of business in any one region of the world or any one airline.
And most importantly in my book, it operates in a business where demand far outstrips supply, so GLS has great pricing power. And because its shares have been hit so hard lately, it pays a whopping 10% dividend. At a time when the Treasury note is around 5%, that's a lot of yield.
Of course, any time you get a lot of yield, you must be giving something up -- and that is the risk of volatility. And to be sure, buying GLS shares today also looks like the proverbial attempt to catch a falling knife. For that reason, start small, and only add more to the position by averaging up as the shares improve over time.
The Growth Story
Why should they improve? Well, Genesis is a lot like other vessel-leasing companies in that it grows by renting its assets out to financially solid customers in the passenger or cargo-leasing business at increasingly higher rates, and also by adding to its fleet through timely acquisitions.
Genesis has already fulfilled its stated mission to grow its fleet by a third this year; this directly provides a commensurate increase in earnings and cash flow. I believe that the civil airliner business is a great asset class as global air travel demand relentlessly increases and planes remain in short supply.
Chief Executive John McMahon told me that Genesis is differentiated from its peers by focusing on much younger aircraft, ranging from a couple of years old to five years old, and by having a slightly less aggressive stance toward acquisition than its peers. It has plenty of room to grow. Genesis started with 41 planes, and it now has 52. In a world fleet of 18,500 commercial jet aircraft, which is expected to double over the next 20 years, you can see the opportunity.
Now add the fact that a third of that worldwide total is on operating lease, which is the business that GLS is in. That percentage is expected to grow to 50% of the fleet over just the next 10 years. To finance its grab for a piece of that growth, GLS locked in a billion-dollar credit facility in April at 5.67% for five years, and LIBOR (London inter-bank offered rate) plus 1.5 percentage points after that, which is very favorable.
McMahon says that he buys most of his planes from airlines that have ordered directly from either
. The carrier then sells the plane to GLS and leases it back; this allows the carrier to focus on its main business of attracting passengers and cargo -- not maintaining planes.
Most Genesis jets are leased to passenger carriers, though GLS has four cargo planes as well. The youth of its fleet is a selling point, because these planes are in the most demand by new international carriers. And the passenger planes are more versatile than cargo-specific jets, because they can carry cargo in their bellies as opportunities present themselves.
Jets in Short Supply
I always prefer companies that have pricing power, and GLS fits that bill well. McMahon says that because the supply of jets is tight, he is renewing 2009 leases now at rates that are 30% above 2008 levels, which is impressive. And I also prefer companies with diversified regional customer bases, and that is at work here, too.
McMahon said that 38% of leases are to companies in Asia-Pacific, 37% to North America, 15.7% Latin America and 7.1% Africa and the Mideast. The customers themselves are also non-concentrated, with 6.7% of the planes leased to Air China Cargo, 6.1% to MyTravel Airways in the United Kingdom, 5.3% to
in Brazil, 5.3% to United Airlines in Chicago and 5.2% to AVA in Taiwan.
While it may seem that too many airlines out there are serving the emerging markets, that is where the growth is. Just check out this stat: The U.S. has 8,600 aircraft to service a population of 300 million. India has just 300 commercial jet aircraft to service its 1.1 billion people. In other words, there are 38,500 people per jet here at home, but 4 million people per jet in India. As long as that country and its peers continue to strengthen economically, companies like GLS will prosper.
For some reason, though, GLS shares are being lumped in with the iffy financial stocks lately. Eventually this storm will pass, and the company will be more appreciated for the simple growth story that it is. The whole situation reminds me of the early days of
Genco Shipping and Trading
. This was a stock that fell 20% from its IPO price in late 2005 before finding its sea legs at the start of 2006 and then going on to quadruple over the next two years.
GLS may well continue to trade lower over the next few weeks, but eventually institutions will support it and bid shares back up. My 15-month target is $27, which would be a 52% move from the current quote. Add an annualized dividend payment of 10% to that, and you're in business.
Again, don't go whole hog now. If you buy some here, don't average down if it falls. Only average up on a move through $21, then $22 and then $23. Also, set a protective stop around $15.99.
At the time of publication, Markman had no positions in stocks mentioned, although positions may change at any time.
Jon D. Markman is editor of the independent investment newsletter
Strategic Advantage. He also writes a regular column for
MSN Money. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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