Aircastle: 7% Dividend Yielder Flying High But Trading In The Basement

Basic Thesis: Aircastle (AYR) is an aircraft leasing firm trading at the cheap end of its recent historical range in terms of book value, P/E and EBITDA multiple despite excellent underlying performance. While the stock is viewed (somewhat correctly) as economically sensitive, I believe the main reason for the selloff is a recent default by its largest customer. I argue that not only are these defaults a normal part of the business, but security deposits offer the company protection and even provide short-term financial boosts that outweigh the risks of re-leasing the defaulted planes. In short, in my opinion, weakness from a customer default is a misread and is creating an opportunity to own a 7% yielding, investment grade asset with chance for at least 40% appreciation if it just returns to its 5-year average percentage of book value.
Company Summary: AYR has a fleet of 234 planes that were 100% placed at the end of Q3. Utilization has averaged 99.4% over the past 5 years. It is mostly in the business of buying planes on the secondary market (as opposed to purchasing new planes from Boeing and Airbus) and then leasing them to airlines worldwide. You can see some fleet details below lifted straight from the Q3 2018 10-Q.

The fleet is mostly narrow body passenger planes, which is a strategic shift conducted over the past 5 years. The company used to have a much larger percentage of freighters and wide-body aircraft. Management has stated repeatedly they feel narrow-body... Read more