Price/Earnings Ratios: Scrutinizing IG Lessors

For over a decade, AerCap & Air Lease (ALC) have held Investment Grade Ratings. Between 2015-2025, AerCap generated average annual net income of +$1bn at a net profit margin of 18%, whilst ALC generated an average annual net income of +$400m at a net profit margin of 23%. Resilience was also demonstrated during COVID, with ALC generating profitability metrics in line with its 10-year average.

So, why are investors only willing to pay a fraction for industry leading lessors versus companies in the S&P500?

HIGH LEVERAGE is a key part of the answer.

The capital-intensive nature of acquiring aircraft requires significant debt, leading to high leverage ratios. High leverage, regardless of how cheap it is, exposes lessors to additional risk.

For context, the Debt-Equity Ratio of companies in the S&P500 is around 0.60, whereas AerCap and ALC stand at around 2.50. Whilst the latter is low for a capital-intensive industry, it is high versus the S&P500.

Industries with high leverage characteristics underperform the S&P500 significantly. Two other industries demonstrate this point:

AIRLINES: In the past 10 years, the Majors in the U.S. have, for the most part, hovered in the P/E range of 2-10, sometimes stretching to 20.

BANKS: Major U.S. banks, such as JPM, BoA, Citi & MS, have held P/E ratios of 5-20, mostly hovering in the 10-20 range.

AerCap & Air Lease Corporation have displayed stellar growth & resilience, underpinning the strong fundamentals of aircraft leasing. Whilst they benefit from cheap leverage in the public markets to fund their capital-intensive business, leverage comes at a hefty price in the eyes of investors.