Over the last six months, AerSale’s shares have sunk to $7.20, producing a disappointing 18.5% loss - a stark contrast to the S&P 500’s 5.9% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy AerSale, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think AerSale Will Underperform?
Despite the more favorable entry price, we're swiping left on AerSale for now. Here are three reasons we avoid ASLE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, AerSale’s sales grew at a sluggish 3.9% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
AerSale’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 11.1%, meaning it lit $11.09 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, AerSale’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of AerSale, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 11.6× forward P/E (or $7.20 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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