Shares of AerCap Holdings (NYSE:AER) spiked 19% at the open Tuesday after the airplane leasing specialist reported better-than-expected earnings and laid out its case for why it will survive the COVID-19 pandemic. The stock fell back down after the open but is still handily outpacing the S&P 500 in midday trading.
Shares of AerCap have lost about half their value this year due to fears the company would be dragged down by troubles experienced by its customers. Airlines have been hit hard by the pandemic, and with travel demand down 90% year over year, the carriers are looking to cut costs, including shedding unneeded airplanes.
Many of those planes are owned by AerCap, which buys new planes directly from the manufacturers and leases them to the airlines. With airlines retrenching, AerCap's business is almost certain to take a hit, and investors have reacted by racing to the sidelines.
Tuesday's earnings release suggests that the stock sell-off was an overreaction. AerCap reported first-quarter earnings of $2.14 per share on revenue of $1.24 billion, surpassing estimates for $1.75 per share in earnings on $1.18 billion in sales. Leasing rents and net interest margin were both down slightly year over year, but overall, the business held up well.
"The COVID-19 pandemic is creating significant challenges for the global aviation industry and for economies around the world," CEO Aengus Kelly said in a statement. "AerCap entered this crisis in a position of strength, with a strong balance sheet and liquidity position, an attractive aircraft portfolio and a high-quality customer base including many of the world's leading airlines."
The second quarter and beyond are likely to be worse, but AerCap is taking steps to prepare. The company has reduced full-year capital expenditures by $2.3 billion in part by revising its new-plane delivery schedule. The company said that all the planes it takes on delivery between now and December 2021 are leased.
The company is also granting lease deferrals of two to three months to try to help its customers through the crisis, which will affect 2020 revenue.
At quarter's end, AerCap had about $11 billion in available liquidity, with more than $28 billion in unencumbered assets it can borrow against if needed.
More importantly, the planes in AerCap's portfolio are relatively young and will be attractive to carriers once the pandemic is contained and travel begins to return to normal, no matter how long that takes. Given we are likely flying into a recession, it is possible some of the airlines that AerCap does business with will not make it, but hard assets like airplanes will remain in demand by the survivors.
It's a difficult time to have a business tied to the aviation sector, but coming out of earnings on Tuesday, AerCap appears undervalued.