While the S&P 500 is up 14.2% since May 2024, Air Lease (currently trading at $50.30 per share) has lagged behind, posting a return of 8.1%. This might have investors contemplating their next move.
Is there a buying opportunity in Air Lease, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.We're cautious about Air Lease. Here are three reasons why AL doesn't excite us and a stock we'd rather own.
Why Is Air Lease Not Exciting?
Established by a founder of Century City in Los Angeles, Air Lease Corporation (NYSE:AL) provides aircraft leasing and financing solutions to airlines worldwide.
1. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Air Lease, its EPS declined by 2.2% annually over the last five years while its revenue grew by 7.4%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Air Lease’s margin dropped by 68.1 percentage points over the last five years. If this trend continues, it could signal it’s becoming a more capital-intensive business. Air Lease’s free cash flow margin for the trailing 12 months was negative 91.2%.
3. Short Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Air Lease burned through $2.50 billion of cash over the last year, and its $21.92 billion of debt exceeds the $460.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Air Lease’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Air Lease until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Air Lease isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 9.2x forward EV-to-EBITDA (or $50.30 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward Costco, one of Charlie Munger’s all-time favorite businesses.
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