AerCap Holdings N.V. (AER): Intrinsic Value and Trailing PEG

AerCap Holdings NV is an aircraft leasing company. Its major activities include leasing, financing, sales and management of commercial aircraft and engines. It operates in Mainland China, Hong Kong, Macau, USA, the Netherlands, and few other countries. They also provide aircraft asset management and corporate services to securitization vehicles, joint ventures, and other third parties. Through its subsidiary, the group also provides engine leasing, certified aircraft engines, airframes, and engine parts.

• AerCap Holdings Is A Value Investor’s Dream Stock (read here)
• AerCap Holdings (AER): Owned by savvy investors (read here)
• Mohnish Pabrai Buys AerCap (read here)

I was surfing the web, and the name AerCap kind of popped up. I was curious about this company/stock’s fundamentals and decided to do a quick study.

It is listed in the New York Stock Exchange.

As per its financial fundamentals (see below), it is not perfect.

Looking at the above figures:

The Good points:

1. In terms of valuation, P/E (7.37) and Price/book ratio (0.94) is low.
2. The PEG is also below 1 which is good.

The Bad points:

1. In terms of Management effectiveness, the figures are not great. Eg. ROE is not greater than 20%.
2. Balance sheet-wise: There is a lot of debt. After subtracting the cash, there is a net debt of USD25.55 Billion.
3. Nevertheless, the current ratio at 1.19 is too high. A high current ratio can be a sign of problems in managing working capital. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
4. The current ratio at 1.19 is low. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
5. There is no dividend yield to speak of.

Seems like there are more bad points than good.

Trailing PEG and Intrinsic Value
Let’s do a quick study on the current share price of USD 49.90 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

P/E: 7.87
Dividend Yield (%): N.A.
10 years EPS compound growth rate: 10.65

The trailing PEG will be 7.87/10.65 = 0.74. Which is good (below 1).

2) Intrinsic Value

I am going to use 2 methods to calculate the intrinsic value.

Method 1

First, let’s look at the estimated 10 years earning growth which is 10.65%. Let’s assume a 20% discount, the figure will be 8.52%.

F = P(1+R)^N

• F = the future EPS
• P = the starting (present) EPS (USD 6.32)
• R = compound growth rate (8.52%)
• N = number of years in the future (5)

Estimated future EPS: 9.51

I will be estimating the future PE of AerCap to be 8.64.

Average of the PE from 2007 to 2016.

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence future stock price of AerCap is 9.51 x 8.64= USD 82.1664

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (82.1664)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence, the intrinsic value of AerCap Holdings N.V. (AER) is USD 40.9

Given the current stock price of AerCap Holdings N.V. (AER) on 22 Sept 2017 is at USD 49.90, there is a NO margin of safety base on the estimated intrinsic value.

Method 2

However, if we factor in Risk-Free Rate, Equity Risk Premium, Beta, Operating Cash Flow and Total number of Shares Outstanding, the intrinsic value of AerCap Holdings N.V. (AER) is USD 73.54 (see below).

Given the current stock price of AerCap Holdings N.V. (AER) on 22 Sept 2017 is at USD 49.90, using this 2nd method there is a margin of safety (around 32%) base on the estimated intrinsic value.

In gist

I was initially curious to know about the intrinsic value and trailing PEG value of this stock.

However, upon looking at the financial fundamentals, this company is not as perfect as I thought it to be.

The trailing PEG and method 2 of the Intrinsic Value seem to suggest that the stock is undervalued. However, I am not comfortable with its high debt level and low management effectiveness (eg. ROE) and no dividend yield.