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Air Lease Rides on Upbeat Airline Industry Amid Delivery Delays

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On May 30, we initiated coverage on Air Lease Corporation AL.

The fortunes of Air Lease are directly related to the airline industry. Per International Air Transport Association (IATA) forecast, the industry is set on a growth path with net profit projected to rise to $38.4 billion in 2018. Moreover, with the overall economy remaining buoyant, passenger traffic has been soaring. Notably, IATA reported 9.5% year-over-year increase in passenger traffic for March. All these upsides are likely to positively impact demand for the company’s aircraft.

The new tax law has been a boon to the company ever since its implementation last December. The company’s bottom line in the first quarter improved significantly year over year on account of the reduced corporate tax rate. Effective tax rate in the period under review was 21.7% compared with 36.6% in the first quarter of 2017.

Moreover, the company’s efforts to expand its fleet are encouraging. Notably, it ended 2017 with 244 owned aircraft and 50 managed aircraft in its portfolio.

We are also impressed by the company’s endeavors to reward its shareholders. In fact, Air Lease has an impressive dividend payment history. Notably, in November 2017, its board raised the quarterly cash dividend by 33% from 7.5 cents per share to 10 cents.

Owing to these tailwinds, shares of the company have rallied 15.8% in a year, outperforming the industry’s 13.6% increase.


 

 

However, the company has been fighting global supply chain and production constraints due to engine issues causing delays in timely delivery of aircraft. For example, the company suffered two Airbus deferrals in the first quarter of 2018, now expected to be delivered in the second quarter.

With a spike in fuel prices, the company remains cautious as it might adversely impact its customer base. It is to be noted that fuel prices have been on an uptrend lately and are hovering around $68 a barrel. The same has escalated more than 10% so far this year. Rise in interest rates and labor prices also have a negative impact on the company.

Zacks Rank & Key Picks

Air Lease carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are GATX Corporation GATX, Expeditors International of Washington, Inc. EXPD and SkyWest, Inc. SKYW. While GATX and SkyWest carry a Zacks Rank #2 (Buy), Expeditors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of GATX, Expeditors and SkyWest have rallied more than 19%, 39% and 65%, respectively, in a year.

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