AerCap: A Quality Compounder Trading Below Fair Value

Core Viewpoint - Investors are advised to avoid airlines and consider AerCap (NYSE:AER) for exposure to the airline industry due to its superior performance and business model [2][5]. Business Model and Performance - AerCap's business model is akin to structured finance, collateralized by aircraft and engines, allowing it to manage risks effectively compared to airlines, which face various operational risks [6]. - Despite challenges such as COVID-19 and geopolitical issues, AerCap has shown resilience and has made strategic acquisitions, such as GECAS, at discounts to book value [6][10]. Valuation Insights - AerCap typically trades at a slight discount to its growing book value, with historical trading around 0.9x-0.95x book value [7]. - The current book value is believed to be materially understated, with estimates suggesting a "true" book value of approximately $123 compared to the reported $78 [10]. Capital Allocation Strategy - AerCap does not pay dividends but focuses on share buybacks and opportunistic acquisitions, which have historically yielded significant returns on book equity [11]. - Recent asset sales have been at a premium of around 25% above book value, enhancing shareholder value through strategic capital allocation [11]. Future Outlook - The consensus earnings estimate for Q4 is significantly lower than expected, with projections of $3 EPS compared to the consensus of $2.44 [13]. - AerCap is on track to buy back approximately 20% of outstanding shares by the end of 2023 and 15% in 2024, indicating strong capital management [13]. - Favorable industry dynamics are anticipated to persist for several years, supporting growth in book value and share price [13].