Sanctions Just Put The Market’s Most Profitable Big-Cap Stock On Sale

aerial photography of airliner

Photo by Ross Parmly on Unsplash

Right now, international air travel has a Russian problem. Or at least, the companies who lease more than 500 aircraft to Russian airlines do.

The sanctions imposed on Russia by the United States and other Western nations ban the supply of all goods and technology. That includes airplanes.

Russia signed the Cape Town Convention back in 2001 - one of 78 parties to do so. The agreement gives lenders the right to repossess leased aircraft, and Russia promised to abide by the treaty.

Of course, Russia also signed an agreement to never, ever attack Ukraine once Ukraine gave up its nuclear weapons.

So it should come as no surprise that while the planes should be repossessed by the end of March, Putin is already taking steps to make sure that won't happen. Many experts fear that those planes are simply gone forever, along with their market value of $10.3 billion.

The market has responded with some panic, as usual - stocks in airline leasing companies with ties to Russia have fallen steeply.

One firm caught in the middle of this is very close to textbook "oversold" territory.

The thing is, I've seen its financials, and I know that this firm is extremely well prepared to weather this problem and come out ahead.

Which means that the current discounted price of the stock is too good to pass up.

To be clear, this company was a good buy before all this happened. Now, it's literally the cheapest profitable large-cap stock you can own today.

And today is the perfect time to get in.

This Company Has More Planes in Russia Than Anyone

AerCap Holdings N.V. (AER) is the largest aircraft leasing company in the world. It currently has 186 airplanes leased to Russian airlines worth about $1.7 billion. Under the terms of the Capetown Convention, repossessing those aircraft should be a routine matter.

Except that Russia has suspended its airline's international activity to make sure those planes stay in Russia and out of reach of lessors.

Russia could contest the repossession, because the airlines have not defaulted and are merely losing their planes because of sanctions. In addition, they could argue that with Russia locked out of SWIFT and the Western financial markets, the airlines could hardly pay if they wanted to.

Even more likely, they could just tell the lenders to go pound sand since most of the planes are safely within its borders.

AerCap's shares are therefore down by about 25% this month, trading around $50 as of today. But I think it's a huge overreaction.

And I'll show you why with some quick math.

AerCap released a statement at the end of February that said, as of Dec. 31, 2021, approximately 5% of AerCap's fleet by net book value was on lease to Russian airlines.

The worst case, then, is it takes a 5% hit to book value if no planes are recovered.

That would end the Russian airline industry. They would never be able to lease another plane from a Western lender again. None of the leading aircraft manufacturers would do business with them.

Also, keep in mind that AerCap has a portfolio of over 3,500 aircraft, engines, and helicopters worth almost $35 billion, with a total book value of about $20 billion right now.

Let's say AerCap understated its exposure by half, and it takes a hit of 10% because Russian airlines decide to keep the planes and, under Putin's protection, tell the lenders to take a hike.

A hit of 10% of equity would be about $2 billion... but the stock has declined by more than $3.5 billion in the last month alone.

And there's always a chance that after some heated discussion, the airlines return the planes to AerCap in hopes of leasing them again when the war is over and sanctions are lifted. Under that scenario, AerCap takes no hit at all.

So in the worst case, this is a temporary setback. In the best case, it's like nothing ever happened.

Why You Need to Buy AER Stock Right Now

The stock is dirt cheap, trading around $50 as of today. At that price, AerCap shares trade for less than seven times earnings and at 62% of book value.

If the company took a 10% hit to book value and earnings, the shares would still be at about 70% of book value and just a little over seven times earnings.

That makes AerCap one of the cheapest profitable large-cap stocks trading on U.S. exchanges right now.

No one knows what is going to happen with the war in Ukraine. Vladimir Putin has proven to be completely unpredictable and unreasonable. He appears to be in complete control in Russia right now, so there's no telling whether he'll ever return the planes.

But even if we get the worst-case scenario and Vlad the Invader decides to use the situation to kick sand in the West's faces, the damage done is already baked into AerCap's current share price.

Investors who start accumulating shares of AerCap now are in for what could potentially be enormous gains as they recover. And as I've shown above, they almost certainly will.

More aggressive traders might want to consider selling short-term cash-secured puts on shares of AerCap, as the volatility has made the puts richer than normal. But this is a great prospect to go long on as well.

Disclaimer: Any performance results described herein are not based on actual trading of securities but are instead based on a hypothetical trading account which entered and exited the suggested ...

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