By David StermanNEW YORK ( TheStreet) -- "Debt" has become a four-letter word, thanks to the financial crisis. But as the economy rebounds, debt can be a benefit. That's because equity comprises a small part of a company's enterprise value (market value plus debt minus cash) and profits can become quite large relative to that small equity base. But investors remain wary of debt-laden companies, recalling that those were among the stocks that appeared to be headed toward bankruptcy when the economy started to contract almost three years ago. As a result, shares of companies that buy and then lease airplanes to major airlines, all of which carry lots of debt, are among the cheapest in the stock market. Yet if the global economy stays aloft and grows sustainably, those companies could see impressive profit and dividend growth. The stars are aligning for this industry. Airline traffic is up 10% from a year ago, banks have become supportive by providing very low interest rates for asset-backed loans for airplanes, and the key players are generating strong cash flow that is helping to reduce debt levels. Most importantly, a glut of unused airplanes that have sat idle are returning to service, and with fewer airplanes available, lease rates are rising. The industry is dominated by the finance arms of GE ( GE - Get Report) and AIG ( AIG - Get Report). But investors can play the sector through smaller players such as Aercap Holdings ( AER - Get Report), Aircastle ( AYR - Get Report), FLY Leasing ( FLY - Get Report) and Willis Lease Finance ( WLFC - Get Report). And as this table shows, all of these stocks appear quite cheap on a price-to-earnings basis:
Action to Take: If the economy weakens anew, these debt-laden stocks would be especially vulnerable. But all signs point to a healthier airline industry. (Read 2 Growth Stocks in a Low-Growth Economy.) Lease rates should continue to rise as demand for new and used planes exceeds production from Airbus and Boeing ( BA - Get Report). If you're in search of dividend yields, Aircastle and FLY Holdings should hold great appeal, as these firms look set to hike their dividends further in 2011 as cash flow rises. Aercap is likely the most stable name in the group due to its relative size, which helps it to arrange special banks loans on especially favorable terms. This article originally appeared on StreetAuthority. To read more articles from David Sterman on StreetAuthority, visit this link. Disclosure: At the time of publication, David Sterman owned no positions in the stocks mentioned.
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