Aircastle Limited: Cleared For Takeoff?

Why It's Featured: Major earnings improvement; almost fully leased jet inventory, even in bad times.
Danger Zones: Highly leveraged; earnings next year may be flat.

Aircastle Limited AYR, through its subsidiaries, engages in the acquisition, lease, and sale of high-utility commercial jet aircraft to passenger and cargo airlines worldwide The company also makes investments in various aviation assets, including debt investments secured by commercial jet aircraft.

Its portfolio consists of 138 aircrafts that were leased to 61 lessees located in 34 countries, and managed through offices in the United States, Ireland, and Singapore. The company was formerly known as Aircastle Investment Limited. Aircastle Limited was founded in 2004 and is based in Stamford, Connecticut.

It is not often you see a stock that has earnings jump by 71% in a year. That is what was most striking about AYR, as it took its earnings per share from 83 cents to $1.42 in 2011 - if the consensus from 6 anlaysts is correct. Earnings will be announced on February 29 before the market opens. Management will have a conference call at 10:00 am EST. Investors can join by dialling 888-539-3612 from the U.S. or Canada. There will also be a webcast on a listen only basis.

The reasons for the large improvement in EPS? Revenues should be up by 14% to $600.63 million, mostly due to rising lease rental revenues.  Both new aircraft and those coming off of leases have been quickly been put back into service. Some were also altered from passenger to freight jets to accomodate demand. Utilization rates are in the 99% range and have been for some time, despite the global economic slowdown and weaker demand for general air travel.

To further aid the bottom line, management has been cutting costs by concentrating on efficiency. So far, 360 basis points have come out of overall expenses as reported in the third quarter.  Expect that to continue (For more stock ideas, see The Online Investor: www.theonlineinvestor.com)

New aircraft are joining the force.  In the first quarter of last year, 2 MD-11 freighter aircraft were purchased.  Once bought, they were immediately leased back to the original owner: EVA Airways. That boosted AYR's share even further in the world air cargo market.

There is a solid, well covered dividend here at 60 cents a share, up from 50 cents paid last year. That makes a yield of 4.4%.  It takes about 32% of earnings to pay that. The next dividend date is March 14.

Investors took this stock down to $2.50 a share in early 2009 after reaching an all-time high of $41.30 in 2007. It is now coming back with solid support from growing earnings. While those numbers will be much better in 2011 at $1.42 per share (if analysts' predictions are correct), for 2012, those same analysts have a consensus estimate of $1.32 per share (with a range of 80 cents to $1.56).

Another possible negative: debt is 67% of the balance sheet at $3.05 billion, and total debt to equity is 225%.

Essential Numbers:
- Price to sales ratio: 1.67
- Price to book value: .74
- Operating margin: 47.79%
- Profit margin: 18.15%
- Return on equity: 8.25%
- Return on assets: 3.7%
- Total cash: $266.25 million
- Total cash per share: $3.69
- Current ratio: 2.57
- Book value per share: $18.73
- Beta: 2.23
- 52 week change: 17.69%
- Total shares outstanding: 72.26 million
- Float: 53.65 million
- Held by insiders: 2.64%
- Held by institutions: 91.6%

Aircastle has some numbers that are very attractive, like its price to book value. However, there are a few that make most investors look away: beta of 2.23 and high debt levels. For those with an appetite for some risk, this stock should have strong interest as it has a notable dividend and good prospects for growth.

Company website: www.aircastle.com.

Ted Allrich
February 23, 2012