Aircastle Undervalued, Again

Although the current stock market is very frustrating for those of us who look at a stocks fundamentals when making investment decisions, I find the recent actions of Aircastle Ltd (AYR) to probably be the most frustrating of the stocks I follow on this site.

I became interested in Aircastle last spring when then significantly reduced their dividend to retain cash in the tight financial market. Yet in June the market knocked half the value out of the stock on the fears that the company’s aircraft leasing customers would have problems with the record oil prices. As these fears proved unfounded, the stock worked its way back up to around $14 providing about a 7% yield.

The new and improved bear market is now taking down all sectors and AYR stock is again under $7. The stock yield is not back up to 12.5%. And this time the falling oil prices should benefit Aircastle’s customer base. AYR leases their aircraft primarily to international airlines with very little exposure to the U.S. airline market. I do not believe that international air travel will experience any significant fall off and the aircraft leases will continue to be paid on time.

I would like to point out the strong financial position of Aircastle. The company currently has free cash flow of  $1.10 per quarter (and growing), providing excellent coverage on the 25¢ dividend. That is free cash flow of over $4.40 per year on a $7.00 stock, unbelievable. Management seems to be doing a excellent job releasing the few aircraft coming off lease and they have been making profitable sales of their older aircraft. The aircraft fleet is undervalued on the books at $4 billion against $2.6 billion of debt. Market capitalization is currently only $560 million.

This is just another indicator how stupid the market has been recently in the indiscriminate dumping of stocks. I have written and given examples several times and will continue to be patient and collect dividends.

Note: AYR is a component of this site’s hypothetical Income Portfolio.

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