Genesis Lease Limited (NYSE: GLS) Recent Price: $13.00Market Capitalization $470M Enterprise Value: $1,550M2008e Revenue $218M 2008e Net Income $38M / Cash Net Income $103MDividend/share: $1.88 Yield: 14.5% Cash Payout Ratio: 66%P/E: 12x EV/Cash Net Income: 15x EV/EBITDA: 8xIntrinsic Value: $16-20Investment ThesisWith Genesis Lease, you are buying physical assets at a 30% discount to appraised value with management expertise and growth thrown in for free. Plus, you are buying at a 40% discount to GE’s entry price and get a fairly stable 14.5% dividend yield as well. Company DescriptionGenesis Lease Limited acquires and leases commercial jet aircraft. As of June 30, 2008 it had 54 aircraft on lease to 35 airlines located in 19 countries. Why Buy?• Chaos in the asset-backed paper market and record fuel prices have created a discount• $750 million in buying power should enable GLS to take advantage of opportunities • GE Factor – GLS has a tight relationship with GE, the gorilla of the leasing business. GE also owns 11% of the company at $23 per share (77% higher than the current price) • Aircraft leasing growing faster than market as airlines realize leasing is less capital-intensive than buying• Genesis Lease’s young fleet is attractive to airlines due to better fuel burn rates Risks• Adverse airline business conditions (high fuel, weak demand) could result in return of planes, declining rates, and lower residual values • Inability to access equity/debt markets on favorable terms or sharp rise in interest rates • Poor capital allocation by managers – buying wrong plane types or overbuying at the wrong times • Leverage is an integral component of the model and returns are sensitive to inputs Value Genesis Lease stock has plummeted 43% since its December 2006 IPO due to investor worries over 1) tight credit that could constrain growth and 2) potential for significant weakness in the airline industry. The fear has pushed the stock to 30% below appraised book value. A fair multiple for the company would be 1.1x reported book value, or $16. Weighting probabilities of various scenarios gives me the same value. However, GLS still has $750 million worth of funds to buy assets and based upon this additional earnings power and modest multiple expansion, the stock could be worth up to $20. This is somewhat of a high risk pick, but the physical assets provide a nice floor for the business. Best regards,Andrew
Recent Price: $13.00Market Capitalization $470M Enterprise Value: $1,550M2008e Revenue $218M 2008e Net Income $38M / Cash Net Income $103MDividend/share: $1.88 Yield: 14.5% Cash Payout Ratio: 66%P/E: 12x EV/Cash Net Income: 15x EV/EBITDA: 8xIntrinsic Value: $16-20
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