A meatier revolving credit facility, positive aircraft trading news and low oil prices have helped the stock take flight.
But Aircastle can still scale higher altitudes. It is among a group of growth stock winners that will beat the market this year.
To be sure, the aircraft leasing and trading industry is highly competitive. Aircastle has a number of rivals, including aircraft leasing companies and airlines.
Larger lessors generally focus more on acquiring new aircraft. These include GE Capital Aviation Services, AerCap Holdings NV , Air Lease Corporation, Aviation Capital Group, CIT Aerospace, SMBC Aviation Capital, BOC Aviation and Avolon Holdings/Bohai Leasing.
Improvement in financial markets over the past several years has brought many new investors to the business. While an oversupply of leased planes could hurt profits, financing capabilities and fleet management will remain essential for success. That's why Aircastle is poised for outsized gains this year.
Aircastle boasts financial resources backed by its ability to tap unsecured capital markets. Moreover, current low interest rates have boosted financing prospects.
Aircastle's biggest customers (in terms of aircraft) include Avianca Holdings, Lion Air, Iberia, Air Berlin and Air Asia.
At the end of 2015, Aircastle's aircraft portfolio consisted of 162 aircraft on lease with 53 customers across 34 countries. This compares with 1,670 owned, managed or on order aircraft in larger rival AerCap's portfolio, according to March 2016 figures. Air Lease Corporation has a fleet comprising 240 owned aircraft and 29 managed aircraft. Aircastle's smaller peer, FLY Leasing has 80 aircraft on lease to 44 lessees in 28 countries.
Aircastle has improved on the risk characteristics of its fleet by offloading certain assets, sharply cutting its investment in freighter aircraft and lowering the average age of its fleet from 11 to 7.5 years. It has also enhanced its average remaining lease term from 4.7 to 5.9 years, boosting earnings potential.
Aircastle's regional fleet concentration is skewed towards the Asia Pacific region with 49 aircraft accounting for 39% of net book value. This is much better than rival Air Lease Corp, where troubled markets like Europe and China account for 30% and 23% of net book value. Europe is witnessing monetary easing to propel growth while the slowdown in China is known to all.
The company's better-than-industry leverage ratio (debt/equity) means that Aircastle can raise capital when attractive growth opportunities arise. Its 2.3 times debt ratio is better than FLY Leasing, AerCap and Air Lease.
With a higher return on asset profile of over 4.2% and a competitive profit margin of over 15%, Aircastle shares at less than one times book value provide good value compared to its smaller competitors. With the improvements to its fleet, liquidity position and franchise, and its excellent dividend yield, Aircastle is a quality stock to own.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.