DD: AerCap Holdings ($AER) – The biggest jet leasing company in the world is buying the other biggest jet leasing company in the world.
Greetings, and fuck you.
Congratulations for being one of the twelve people who will see this amidst the flood of all the valuable content submitted on a continual basis by our esteemed 5-month-old simian membership. We’re going to make some money, they’ll keep hodling their dicks underneath the teetering lid of the cookie jar.
Disclaimer: Join me in this play, or don’t, I do not care. This is the part where I tell you that I’m not responsible for the decisions that you make with your life.
AerCap Holdings, Inc. is an aircraft leasing company based out of Dublin. They don’t make planes, they don’t fly planes. They just own planes, and they lease the shit out of them out to airlines around the globe. They do this a lot, and in fact they’re the largest jet leasing company in the world, both in terms of units and revenues.
And within the next 30 days they’re about to get a whole lot fucking bigger.
But before we get to that, let’s deal with the first question that’s on your mind.
Is this a reopening play?
The short answer is no, AER is already back to pre-pandemic levels.
While airlines are generally seen as a reopening play that has yet to fully recover, you can consider AerCap to be fully recovered at this point. AerCap doesn’t have direct exposure to demand for commercial flights, but rather to the ability of commercial airlines to service their lease obligations. For some time during the COVID pandemic, there were doubts over not only the airlines’ ability to pay, but even over their ability to remain a going concern. AerCap, like banks and REIT’s all around the world, was forced to defer lease payments and restructure leases to accommodate the sudden disappearance of demand for air travel. While demand has been slow to come back, the airlines’ confidence in a comeback has been enough to get them back to tap into whatever liquidity they have to get themselves back on schedule with their lease payments.
Currently, AerCap has about a 98% utilization rate of its aircraft, and substantially all lease payments have resumed their normal pace. As of year end 2021, the business had totally recovered from an operating cash flow perspective (per the 4Q investor presentation):
Furthermore, CEO Angus Kelly, has repeatedly gone on record stating that confidence is strong that the global air travel industry will return to normal, as communicated to him by his customers, and as evidenced by the collection of lease payments. As for how that affects AerCap stock, air travel recovery to pre-pandemic levels has already been priced in.
AerCap Holdings – what is it?
This is an extremely well-managed, boring-ass business. As I mentioned, this is the largest commercial jet leasing company in the world. They buy airplanes using debt, then they lease those airplanes to airlines and collect monthly lease payments. Think of them like a REIT, but in the sky.
Their list of clients is really fucking long, including roughly 200 airlines in 80 different countries. Name an airline; it is most likely a customer.
According to 3/31/2021 financials, the business controls about $42 Billion in assets, with $34.5 Billion of that being book value of aircraft. The aircraft consists of the following:
As of 3/31/2021 AerCap owned 931 aircraft and managed 105 aircraft, with commitments to purchase 285 new aircraft through 2027. This table also shows average remaining lease term of 7.3 years.
Normally this is the most important thing for me to consider, but on this deal I don’t find it all that pertinent. You’d be hard pressed to find a company with more stable cash flows year over year. Revenues between $4.5 Billion and $5 Billion, each year. Net income of right about $1 Billion, every year. 2020 was a shitty year, for reasons we all know and understand. As I touched on above, the existing business is back to normal as of this writing.
Ok, so why are we here?
The Big Fucking Deal:
On March 10, AerCap announced that it had entered into a definitive agreement with GE to acquire 100% of GE Capital Aviation Services (GECAS). The deal is worth approximately $30 Billion.
That $30 Billion is buying a lot of fucking aircraft. This article from 2018 shows GECAS as the 5th largest jet leasing service in the world, however more recent articles from the date of the merger announcement in March say it’s the second largest, behind only AerCap. In either case, GECAS itself controls an additional 1,600 aircraft and helicopters (consisting of aircraft owned, serviced, and on order) and has a client list consisting of 200+ customers in 70 countries.
So this deal makes AerCap the lessor to just about every damn airline on the planet. It is the world’s biggest buyer of aircraft from Boeing and Airbus. It is partnering with GE, which builds 70% of the world’s narrow-body aircraft engines.
It also expands AerCap’s business into a brand new operational territory.
Aside from being a commercial aircraft giant, GECAS owns an entity called Milestone, which is currently the world’s largest helicopter leasing company. According to the website – “Milestone is the world’s leading helicopter lessor, with the largest civilian helicopter fleet and a suite of leasing and debt solutions. Milestone provides financing options to operators in the offshore oil & gas industries, search & rescue, EMS, police surveillance, mining, and other utility missions.”
I could keep going but the point is this – AerCap is going to be really freaking big.
bUt WhAt’S tHe ShOrT iNtErEsT?
Go fuck yourself. There isn’t any short interest. Maybe apologies are in order since this is a profitable and stable company, unlike all the shit you usually trade. But nobody out there is betting on this business going bankrupt. Everybody is long. Believe it or not it’s a good thing when the whole financial world doesn’t expect you to fall flat on your face.
Note, while this shows there are only 3 analyst targets within the past 3 months, I’m seeing on Webull that there are 9 analysts covering AER with an average target of $71.86 and the same high and low as represented above.
And then there’s this Simply Wall Street article that shows a fair market value at $110 as of a couple weeks ago. Whatever.
Point is, this company is undervalued without considering the acquisition.
Other Shit You Need To Know
It’s not all rainbows and sunshine and unlimited upside. As with anything, there is a chance this wont be as super awesome as expected. Here’s some stuff to ruminate over before pulling the trigger on this play–
THIS PART IS IMPORTANT
Part of the financing of the acquisition is going to come in the form of share issuance directly to GE. AerCap will create 111.5 million shares, and deliver them to GE at the closing table, scheduled for some time in 4th Quarter 2021. That’s about $5.8 Billion in share value at today’s prices. Today, there are currently only 130 million shares outstanding, and AER has a market cap of $6.8 Billion.
However, with the acquisition, AerCap is adding roughly $9 Billion in Net Assets. Here’s a table prepared by Dhieren Bechai, the writer on Seeking Alpha who seems to know what the hell he’s talking about:
Following the deal, GE will control about 46% of the combined company and will be entitled to nominate two directors to AerCap’s Board of Directors.
Possibility that the deal is not approved:
What if the EU decides not to approve the deal? Well I guess I’m fucked, then.
"The EU competition enforcer can approve the deal with or without concessions or it can open a four-month investigation if it has serious concerns.
Analysts said the scale of the combined entity, controlling about three times the number of aircraft as its nearest competitor, Dublin-based Avolon, could force AerCap to offload aircraft to meet antitrust demands."
So, what’s the play?
Here’s the chart right now. It’s on a dip, and I consider the current price of $52 to be an excellent entry point. I’ve been waiting for the price to die down to this level, and I finally started buying yesterday. The upper end of the channel it’s been in is about $62.80, which is the pre-COVID high. I’m betting on it busting through the top of the channel if we get deal approval in July.
I’m also trying to stay a little conservative with my positioning. If the deal does not get approved, AER should still bounce off the 200 EMA and get back in an uptrend with a positive earnings report and strong guidance in July (which it will be).
You can play this with shares obviously, and you might see the open interest on the calls and decide that’s a better plan. I have a few shares but those have been a long term hold for me.
As for me, I’m playing this with calls. As of right now, this is my position:
I am going to keep adding as long as the price stays down. I just started buying yesterday, and added more today. I think that this $52 level is the floor, and I will keep adding as long as the price stays down below $55.
Again — join me on this play, or don’t, I do not care.
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July 1, 2021 at 10:58PM