Here’s a simple recipe for generating serious wealth: Spot a lucrative business trend before it fully takes off; find an innovative company poised to thrive in that growing niche; buy shares, and settle in to hold them for the long haul.
In a perfect world, that strategy would be as easy to execute as it is to describe, but of course, finding such trends and the companies best positioned to benefit from them is difficult. Difficult… but not impossible. Case in point: Air Lease Corp. (NYSE: AL) and Alarm.com (NASDAQ: ALRM) appear likely to reward buy-and-hold investors richly, thanks to looming long-term booms in the global commercial aircraft and smart home security markets.
Image source: Getty Images.
Air Lease Corp. isn't exactly a household name, but it's well positioned to benefit from growing global aircraft demand in the coming decades. The U.S. based company generates most of its revenue through (you guessed it) leasing planes -- specifically, the narrow- and wide-bodied jets that are the bread and butter of the commercial aircraft market.
Let's talk about why Air Lease shares make sense to own through 2030. Industry juggernaut Boeing's (NYSE: BA) highly respected market outlook forecasts 41,030 deliveries of commercial aircraft worldwide between 2017 and 2036 -- a staggering $6.1 trillion market value. Over that same period, it expects global passenger traffic to grow at a healthy 4.7% annually, even higher than anticipated GDP growth. That passenger traffic trend is a critical factor in forecasting demand for Air Lease's fleet. And as you can see below, the growth of that metric has remained strong throughout many speed bumps.
Note: RPKs = Revenue Passenger Kilometers Source: Boeing and ICAO scheduled traffic (September 2015) & IATA 2017. Graphic source: AL investor day presentation October 19, 2017.
Now, global economic growth and increasing passenger traffic won't do much for Air Lease investors if demand for its fleet doesn't exist. The foundation of its investment thesis is that leasing jets offers durable advantages over buying them. Airlines choose to lease because it requires less cash and financing, gives them more flexibility in matching fleet with demand, and eliminates residual value risk. (It also relieves them of the burden of selling the used aircraft, which sometimes happens at a loss). Those factors have driven the share of fleet ownership by lessors from 1.7% in 1980 to 24.7% in 2000 and up to roughly 39% in 2016.
Currently, Air Lease owns 236 aircraft and manages another 51, but it also has 373 on order to help supply growing global demand for newer aircraft. If you're looking for an investment well positioned to grow into 2030, its shares are worth considering.
If you haven't heard of Alarm.com, you will -- sooner rather than later -- as the smart home market rockets ahead. Its cloud-based platform secures homes and businesses through a broad array of connected devices, and with a unique interface.
Americans view security as one of the top benefits of smart home technology, ahead of options such as energy/resource management, or indoor convenience/entertainment. Alarm.com aims to give consumers something better than a traditional security service, controllable only from home-based devices with limited capabilities. Instead, it offers users mobile-app access to their smart home security systems. According to Parks Associates, the smart home security market is projected to double from 8 million homes in 2016 to 16 million homes in 2021.
Beyond that, Alarm.com aims to benefit from other compelling growth catalysts. Management wants to expand its commercial business, grow internationally, and get involved in property management, vacation rental management, and energy management, among other categories.
Image source: Getty Images.
So far, so good: Alarm.com's third quarter produced 33% growth in revenue, 65% growth in adjusted EBITDA, and a 350 basis point improvement in gross margin to 65%. However, this company's position isn't unassailable, despite its lucrative potential. It's tough to build a durable competitive advantage around a smartphone app, even if your product is innovative and well done; traditional security businesses will create their own smart technology solutions, and other smart home companies will inevitably attempt to dabble in security.
If management can execute growth strategies, fend off competition, and continue to offer consumers a compelling service that generates recurring subscription revenue, this stock will turn into a big winner by 2030.
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