3 Takeaways From Air Lease's Earnings

If you're looking for a well-managed, high-growth company for your portfolio, then you may want to take a hard look at Air Lease (NYSE: AL  ) . The company buys aircraft and leases them to airlines around the world that need new aircraft but may not be in a position to buy them themselves. It can be a very profitable business when executed correctly. Interested? The air lessor announced second-quarter earnings not too long ago, which can serve as a great starting point for your research into the company. Here are three things investors can learn from the latest financial results.

1. Growing and growing and growing
Air Lease is growing everywhere you look. Year over year, the company grew sales 31%, net income 53%, cash provided from operations by 6%, and diluted EPS by 46%. The company even managed to increase its pre-tax income margin from 27.7% a year ago to 31.9% in the most recent quarter. That is a scary trend, but what is driving that growth? Is it sustainable?

It all comes down to the company's fleet. By expanding its stable of aircraft, Air Lease is better able to serve its customers, expand its customer base, and penetrate new markets. That, of course, drives the top and bottom lines for investors. Consider how the company has steadily added new aircraft over the years and how it plans to continue doing so for the foreseeable future.

Historical data presented in orange, future growth with expected orders presented in blue. Source: Air Lease SEC Filings.

Air Lease is currently expecting to add another 24 aircraft in 2017 and up to 213 aircraft in subsequent years. Anything can happen in the years ahead and the market could certainly change, so I wouldn't get too excited about what happens after 2017. The important thing to realize is that management is focused on the long-term, which makes us Fools smile.

2. Focus on growth opportunities
Growing your fleet won't take you very far if you cannot capitalize on the market opportunities available, the largest of which are in Asia and Europe. Leasing aircraft is a popular practice in Asia, where airlines are faced with challenges including keeping up with population growth and a lack of access to large amounts of capital needed to buy new aircraft. Meanwhile, Europe is becoming a major destination for air lessors with new fleets due to the continent's focus on efficiency and strict emissions standards.

Good news: Air Lease is betting heavily on both regions and recently increased its exposure to Asia.

Region

Fleet % of Net Book Value, 2Q13

Fleet % of Net Book Value, 4Q12

Asia/Pacific

39.3%

35.9%

Europe

37.2%

38.4%

Central & South America, Mexico

11.7%

12.6%

Middle East & Africa

5.4%

5.8%

Source: Air Lease press release.

Is the company overexposing itself to just two regions? That is certainly a concern investors will need to weigh for an investment, although I believe the growth trends remain intact at the moment. It isn't the only risk to consider, however.

3. Lots of debt and competition
Becoming a major player in the aircraft leasing business requires a substantial amount of debt. It is a necessary evil of the industry, but in a worst-case scenario, it could become a major liability. For instance, Air Lease has pledged 52 aircraft in its fleet as collateral against its secured debt obligations. That is down from 55 at the end of 2012, but it still represents about 36% of the net book value of its total fleet. Of course, industry peers are in the same boat to pay for their large debt holdings.

Company

Market Cap

Debt-to-Assets, 2Q13

Air Lease

$2.8 billion

61.9%

Aircastle (NYSE: AYR  )

$1.3 billion

59.6%

AerCap Holdings (NYSE: AER  )

$2.1 billion

67.1%

Source: Google Finance and company press releases.

Aircastle has 158 aircraft in its fleet and also relies heavily on Asia and Europe. However, it has actually lost one of its aircraft since the end of last year, while Air Lease has added 19 in the same time period. Additionally, Aircastle has 67 customers in 36 countries. That's impressive, but Air Lease bests it again with 78 customers in 44 countries.

AerCap, on the other hand, boasts a fleet of 227 aircraft and is also growing at an impressive clip. It raised adjusted EPS to a record high in the first half of 2013, which was 29% higher than the prior-year period. It will take some time for Air Lease to overtake the company in terms of pure fleet size, but I think the former's growth trajectory is more favorable to long-term investors.

Foolish bottom line
I think Air Lease is a great growth company for any portfolio, despite the fact that it flies under most investing radars (no pun intended). It expects to grow its fleet by 76% from the end of June to the end of 2017. You may not be able to count on the additions penciled in after that point, but you can bet that management won't be throwing in the towel on future growth opportunities. I'll be looking to add shares to my portfolio in the next few quarters. 

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