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Episode: Amazon Enters a New Lane

Author: The Motley Fool
Duration: 00:29:48

Episode Shownotes

As if everything weren’t already enough, Amazon now sells cars. (00:14) Asit Sharma and Mary Long discuss: - Disruptions to traditional car dealerships. - Amazon’s next potential venture. - The rise and fall of GM’s driverless ambitions. Then, (18:40) Jim Gillies and Ricky Mulvey look at Aercap, an airline leasing

company that sees debt as a “raw material.” Companies discussed: AMZN, CVNA, HYMTF, GM, GOOG, GOOGL, AER Host: Mary Long Guests: Asit Sharma, Ricky Mulvey, Jim Gillies Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Full Transcript

00:00:05 Speaker_01
One car dealer revs up, while another slows down. You're listening to Motley Fool Money. I'm Mary Long, joined today by the illustrious Asit Sharma. Asit, thanks for being here.

00:00:20 Speaker_03
No one's called me illustrious since I put too much hair gel in my hair as a 20-something, so I appreciate that.

00:00:29 Speaker_01
You know what? I'm out here trying to help you out, gas you up a little bit. We were talking about books before we started recording. I feel like that puts another check in the illustrious box for you, but I digress. I digress.

00:00:41 Speaker_03
I'll wear the luster proudly throughout the rest of the day.

00:00:43 Speaker_01
There we go. What a way to start. That's not why we're here. That's not why we're here. No, we're here to talk about a lot of car stuff today.

00:00:49 Speaker_01
We got news yesterday that Amazon has officially entered the car dealer business, or for now, specifically, the Hyundai biz. In 48 US cities, you will now be able to buy Hyundai vehicles off of Amazon through participating dealers.

00:01:03 Speaker_01
So Amazon kind of acting as a middleman here. You'll also be able to finance the car, arrange a pickup, and or trade in your old car all through the Amazon app. More manufacturers are allegedly coming next year.

00:01:15 Speaker_01
Right off the bat, I can think of a bunch of different players who are affected by this announcement. Let's maybe start with traditional car dealerships. What do you think they are thinking right now?

00:01:27 Speaker_03
I think for them it's wait and see. So let's start with traditional car dealerships that operate within the Hyundai. And I'm sorry, I pronounce this differently than you, Mary, but... I could very easily be wrong. It's just stuck in my head.

00:01:42 Speaker_03
Hyundai dealerships You get to opt into this program. You don't have to participate.

00:01:48 Speaker_03
Even within the umbrella of this one carmaker, I think dealers are looking to see what the economics will be like for those who participate, whether it's better to sacrifice a little bit of your profit to a company like Amazon in a trade for volume,

00:02:04 Speaker_03
or just to stick through your own channels that you've built with Hyundai and with your local community. So I noticed, I went on this morning, I am an Amazon Prime customer. I thought, let me buy a new vehicle this morning.

00:02:15 Speaker_03
I bought maybe a light bulb, set of light bulbs from Amazon Prime last. Let me buy a vehicle. I didn't get all the way till till the click to purchase.

00:02:25 Speaker_03
But what I did notice is that the dealership that showed up is about 54 miles away from me, which means that some other dealers haven't opted into the program. But this is available in, I think, like 48 states.

00:02:36 Speaker_03
So, if you are a car dealership, whether you're this brand of vehicle or you're maybe with, let's say, GM, who we're going to talk about a little later, you're going to see what the volume looks like and if it's maybe worth you dabbling or participating in.

00:02:52 Speaker_01
When you were going through this car buying process on Amazon, potentially, it didn't go all the way, I heard a rumor that you can get a $2,300 gift card. Was that offered to you, too?

00:03:01 Speaker_03
I didn't get to that point, and I was scared to. Amazon has that one-click function in Prime, so if you're not careful, you might end up just buying the vehicle outright. Actually, I think they protect against that. I did hear about that.

00:03:16 Speaker_03
It's sort of enticing. one thing to make you to try it out. I do want to say this about the interface. It's funny, the interface wasn't that glamorous.

00:03:26 Speaker_03
Actually, there's a much sharper and crisper interface if you go to a Hyundai site, but there's a lot more choice. You can build your vehicle, you can sort around, route around the different makes and models.

00:03:37 Speaker_03
Amazon gives you that Amazon experience where they pretty quickly show you a number of vehicles, you click through, then you get your classic prime side panels so you can configure the vehicles by

00:03:49 Speaker_03
whatever your trim, your price, your parameters are, and that'll shift the results to different dealerships.

00:03:57 Speaker_03
So you can see that while it's not so flashy as we've come to expect, those who visit the large car manufacturers' websites if we're buying a new vehicle, it is a faster process and you're used to it.

00:04:11 Speaker_03
So I had some thoughts that it might be intuitive for many people to use.

00:04:16 Speaker_01
We hit on how traditional car dealerships might be feeling about this news. What about less traditional ones? What do you think the vibe is at Carvana's corporate office this morning?

00:04:25 Speaker_03
Carvana's been through a lot. They had troubles with getting their title system right a few years ago. Then the economy went in reverse on them with high interest rates. Their business model nearly snapped in two.

00:04:39 Speaker_03
I think because they've been through the fire a couple of times, they've been through the crucible. They're probably like, so what? They're battle-hardened.

00:04:49 Speaker_03
And two, they probably have some time, if you look at the long-term horizon for how all this plays out, because Amazon is going to naturally try to work with new car sales up front. That's going to be more profitable for them.

00:05:01 Speaker_03
They don't necessarily want to get into the business of dealing with used cars. That requires a different type of investment and hand-holding.

00:05:10 Speaker_03
That's where Carvana put its money, to make that experience great for someone who wants to buy a used vehicle. They are prone to the vagaries of that market. So, when used car prices are higher, they make money.

00:05:23 Speaker_03
And when the economy isn't so great, they hit the skids. But I think it's a space that's second order for Amazon. So, I don't think they're that scared yet. I think the vibe pretty much is, alright, it's 10am, let's go grab another cup of coffee.

00:05:37 Speaker_01
This is second order for Amazon, as you said, but it still feels like a pretty big jump. Why do they want to, bear with me, get into this race in the first place?

00:05:48 Speaker_03
Yeah, well, Mary, we've touched on this in some other conversations about Amazon. My admiration for Okay, let me stop here. I admire Amazon. There are a lot of things I don't admire. I get in trouble when I say this.

00:06:00 Speaker_03
I don't like some of their business practices. I don't like some of the things that they do and how they treat warehouse employees. I think automation, for one, makes humans compete with the robots and I think they run their drivers and trucks

00:06:15 Speaker_03
way too hard. Having said all that, what I do admire about Amazon is that they're steadily marching towards a trillion dollars in annual sales. They're going to hit that in a few years.

00:06:25 Speaker_03
I've talked before about how they're going to bypass Walmart as the world's largest retailer. When you hit that scale, it becomes harder and harder to move the needle using the top line.

00:06:36 Speaker_03
If you start selling a new line of dinner cloth napkins on Amazon.com, that's not really going to help you move the needle that much.

00:06:43 Speaker_03
Now, they have to do that, but look, get into a big ticket item business where you have a large transaction that's crossing your books, and then you make some kind of appreciable slice on that.

00:06:54 Speaker_03
So, if we go past or vision past just working with Hyundai, then there are many other manufacturers, many other big ticket

00:07:04 Speaker_03
vehicle pathways for Amazon, if they get other companies to participate, where that starts to become appreciable to that top line and can move the needle on profits and cash flow.

00:07:15 Speaker_03
They're so big right now, it's almost like this makes sense when you think of how huge their scale is.

00:07:21 Speaker_01
We already think of Amazon as the everything store, and as you've mentioned, they have their hands in so many different pots as well.

00:07:28 Speaker_01
If you, Asit, are in charge of determining Amazon's next big business venture, it doesn't even have to be big actually, just their next business venture, what would you say it should be?

00:07:39 Speaker_03
I think they should get into the precision agriculture business.

00:07:44 Speaker_01
I was not expecting you to say that.

00:07:46 Speaker_03
Only half jokingly. I mean, look at Tesla. Okay. There's a company that also invests a lot in cloud computing, in computation and artificial intelligence, but it has this whole manufacturing bent. And that also results in big ticket sales for Tesla.

00:08:04 Speaker_03
So, Amazon has so much smarts in the world of computation. They've got everything that Tesla conceivably has, or Apple conceivably has, in the electronics portion of any kind of consumer good. Why not manufacture something?

00:08:19 Speaker_03
You could sell big ticket items. It would not be that hard for Amazon to start a small prototype R&D manufacturing operation or just snap up a couple and start figuring out how to compete with like the John Deere's of the world.

00:08:34 Speaker_03
I know it's crazy, but it's also Wednesday. What's your next question, Mary?

00:08:40 Speaker_01
Okay, well, I promised lots of car talk, so we're going to move on to, stay in the same lane, but kind of move on to a different angle.

00:08:46 Speaker_01
While all this is happening at Amazon, meanwhile, over at GM, we got news that they're shutting down Cruise, their robo-taxi unit. GM has poured between $8 and $10 billion into this department since 2016.

00:08:59 Speaker_01
Quick trip down memory lane, Asit, when this first rolled out, what was the original dream for Cruise and what it could be?

00:09:05 Speaker_03
The original dream was for Cruise to become a platform so that GM could be more than just a company that made and sold cars.

00:09:14 Speaker_03
If they built a fleet of robo-taxis somewhere here in the US that they could then export around the world, then suddenly GM becomes sort of this ride-hailing for service business. and not the sleepy old GM that we all have known all our lives.

00:09:30 Speaker_03
So it's a romantic dream, but it's a dream that also takes capital, smarts, patience, a lot of other things. But that was the vision.

00:09:41 Speaker_03
And I still applaud GM for having that vision and understanding that to compete in this new world, you've got to evolve. You've got to become more than what you were. But that looks like it wasn't quite the solution for GM.

00:09:53 Speaker_01
So why did GM decide to abandon this grand vision that they had?

00:09:59 Speaker_03
So it goes back to what I was just talking about. the technology that they were developing. I know they have the capital. GM outputs a lot of free cash flow each year, but this wasn't a small portion.

00:10:12 Speaker_03
I think the total run rate of capital expenditure on this business, on the cruise robo-taxi concept, was like $2 billion a year. That's a lot of money. And then, patience.

00:10:26 Speaker_03
Sometimes you are patient as a management team, but your shareholders aren't as patient. Remember, GM was telling investors that this business would mature by the end of the decade.

00:10:35 Speaker_03
It doesn't look that close to it, so I think investors were getting antsy on how much money that GM has put into this business. I'm going to call it rough numbers, maybe $8, $9, $10 billion, and what the perceived returns could be.

00:10:51 Speaker_01
So those perceived returns, I mean, Mary Barra had been talking about the idea that Cruz could generate $50 billion in annual revenue by the end of the decade, by 2030. Obviously, by shuttering this unit, that's no longer on the table.

00:11:04 Speaker_01
What other project might replace that potential revenue? Was a success of Cruz already baked into GM stock? And does that now have to be re-evaluated?

00:11:14 Speaker_03
I'm going to give an answer that seems very counterintuitive here, and that it was baked into the stock price. But if you look at the stock today, it hardly moved, right? I think GM is down maybe 1.5%.

00:11:27 Speaker_03
What I mean by that is that lots of analysts who model out to 2030 use a type of reasoning where you're basically taking the probability of something happening and then multiplying that by the total expected return.

00:11:40 Speaker_03
So, if Mary Barra says that this is going to be this multi-billion dollar business, $50 billion, as you say, in annual revenue by 2030. I'm an analyst who feels very skeptical and thinks, well, I think there's only like

00:11:54 Speaker_03
a 5% chance of that happening by 2030, I may just plug in $2.5 billion of revenue instead of $50 billion into my forecast.

00:12:03 Speaker_03
I think it was included, and as we got closer to 2030 and investors, yourself, myself, people who use spreadsheets, institutional investors, everyone started to model this out.

00:12:14 Speaker_03
we would take the probability of what we saw on the ground and then attribute that to what the stock should be valued at. The stock could conceivably have risen if GM had stuck it out. That's one thing that's clear today. The other thing that's

00:12:30 Speaker_03
clear is that it's so unclear what could possibly bring that much revenue in the next five or six years.

00:12:37 Speaker_03
I don't think they have a good answer to that, but investors probably feel good today that they get back maybe a billion dollars worth of cash flow after some restructuring. It's important to know that

00:12:48 Speaker_03
The other part of that cash burn is going to continue to go on. They're going to try to develop Cruise now as more of a technology for a new car you or I might buy.

00:12:57 Speaker_03
Maybe by 2030, we have a fully autonomous vehicle that GM will offer that takes all this learning and technology, but isn't going towards building this incredible robo-taxi fleet. We could just buy that technology.

00:13:12 Speaker_03
So, there'll be some yield out of it, but there is no good answer now to any kind of revenue source that's going to bring $50 billion more to their top line in the next five to six years.

00:13:23 Speaker_01
Obviously, GM is not the first company to pursue these driverless ambitions. They're also not the first company to abandon these driverless ambitions.

00:13:32 Speaker_01
Uber left the game in 2020 when they sold their self-driving unit to Aurora Innovation, which is backed by Amazon. Lyft followed suit a year later. Ford's unit, Argo AI, closed its store a year after that in 2022.

00:13:44 Speaker_01
Apple earlier this year noted that it abandoned its autonomous electric vehicle pursuits. So those are a lot of big companies with a lot of big money. Yeah, clearly, like they're all exiting this race.

00:13:55 Speaker_01
So clearly, it's having the money is not enough to get you closer to the finish line. If that's true, then what is what do you actually need to, to make these grand visions of driverless robo taxis a reality?

00:14:10 Speaker_03
I think what you need from the start is a commitment to what's called level four of driving autonomy. So this is high driving automation.

00:14:19 Speaker_03
This is a condition in which you're sort of like a passenger in the car and the car doesn't need a human driver for most situations.

00:14:29 Speaker_03
That's really hard to do, and I think many companies get into this understanding that they're already potentially at level two. So, level two is like partial driver assistance. Something goes wrong, you can grab the wheel.

00:14:42 Speaker_03
transition from this level two to level three, which is, okay, you're a passenger, you're just watching what's going on, that is harder than most companies assume.

00:14:52 Speaker_03
Because to get to this level of autonomy, you need a lot of different types of technology. You need radar, you need LiDAR, you need sensor capability, you need a lot of artificial intelligence, you need high definition mapping. There's so many

00:15:08 Speaker_03
I didn't even mention ultrasonic sensors. Let's not even get into this level of detail, but you can see from what I'm saying that there's so much involved in getting to truly driverless states that, again, patience comes into play.

00:15:24 Speaker_03
Patience of management teams, patience of shareholders, patience with Regulators, like in the US, we still don't have the full regulatory landscape worked out. We don't have the insurance landscape worked out.

00:15:37 Speaker_03
What happens when one of these robo taxis just collides with a crowd of people who are coming out of a concert? God forbid that should happen.

00:15:47 Speaker_03
But this stuff is so much harder than it looks, both on a capital level, a technological level, a patience level. This is why you see even companies with big pockets, deep pockets, just pull up stakes after a while.

00:15:58 Speaker_03
And kudos to Waymo, to Alphabet, because Waymo has been around now.

00:16:04 Speaker_03
I'm sure I'm misquoting this, but the early stage, since 2009, 2010, and rough numbers, Alphabet's probably invested $20 billion already, but they've got their robotaxi fleet in several cities now, and we're going to see that grow in the next couple of years.

00:16:20 Speaker_03
So, if you can stick it out, you're suddenly dominating a market.

00:16:25 Speaker_01
Okay, so Waymo sets us up for a great segue. We've got a daily news digest called Breakfast News. It's free to subscribe to. It summarizes market and business news each morning, and it closes with a fun question.

00:16:35 Speaker_01
Today, that question is all about robo-taxis. So I'm going to pose to you, Asit, the same question that Breakfast News poses to readers this morning.

00:16:44 Speaker_01
Have you ridden in one, and do you think we'll be seeing them in most cities, not just these few that they're already in, but most cities anytime soon?

00:16:51 Speaker_03
Unfortunately I haven't. I live on the east coast, Mary, and so the centers of development started from the west coast and moved gradually to the east or Detroit.

00:17:02 Speaker_03
So I really don't have anything that's close by to me where I could even take advantage, but I fully intend to next time I travel out west, as long as it looks safe, you know? want to get out of the taxi and feel great. How about you?

00:17:15 Speaker_01
I was just in Phoenix for a half marathon a couple of weeks ago, and I was so excited to try and ride in a Waymo. I am really not that excited about self-driving cars in general, but just being close to a Waymo got me amped.

00:17:29 Speaker_01
I wanted to try my hand at it, or I guess not try my hand at it because I'm not doing anything. But I will say, my friend and I were, the bus that was going to take us back to the parking lot after this race was taking forever to get there.

00:17:40 Speaker_01
So I said, oh, perfect opportunity to call a Waymo. And it was going to take 25 minutes to get to us. And so we wound up, you know, the bus that we had been waiting for wound up getting there in that time. So we did not try it.

00:17:52 Speaker_01
But, you know, if I'm in a city that offers it again, I'll surely check it out. But that wait time was a little bit too much for me at the time.

00:18:00 Speaker_03
Well, maybe at one of our next Fool meetups, if we're in a city where there are some Waymo taxis around, we'll try it together.

00:18:05 Speaker_01
I like that plan. Asit, thanks so much for joining me this morning. Always a pleasure chatting with you.

00:18:11 Speaker_03
Thanks a lot, Mary. This was a lot of fun.

00:18:19 Speaker_01
You can subscribe to Breakfast News at breakfast.fool.com. I'll drop a link in the show notes for you to do that in case it's of interest. Okay, we already talked cars. On today's show, how about planes?

00:18:29 Speaker_01
Up next, Ricky Mulvey makes good on a promise to let Jim Gillies talk about AirCap, an airplane leasing company that's gushing cash.

00:18:40 Speaker_02
All right, Jim, we've recorded, I think, about three A segments over the past few months where I've promised that we were going to talk about this airline leasing company called AirCap, primarily because it's a company that you seem to be pounding the table for.

00:18:52 Speaker_02
And when you're doing that, I usually listen. So this is an aircraft leasing company called AirCap. Why are you pounding the table for it?

00:19:01 Speaker_00
Well, thanks, Ricky. I guess I am. Why is that sarcastic? Hang on. Hang on.

00:19:06 Speaker_02
You gave me a little sarcastic thing. I'm giving you time to talk about this company that we normally don't talk about on the show. I thought it would be nice.

00:19:16 Speaker_00
OK, well, I accept that in the manner in which you've just reframed it. So, yes, it is a company that I own as a company. I've recommended multiple times.

00:19:23 Speaker_00
company that I guess I sort of am patting the table on maybe in the context of I think there's a lot out there that's enthusiastically valued. Is that a fair way to put it?

00:19:34 Speaker_02
Sure. That's a nice way of putting it.

00:19:36 Speaker_00
Well, you know, and enthusiastically valued companies have this proud history of a 2000, 2001, 2002, a 2008, 2022 coming along. And all of a sudden those enthusiastically valued companies get a little less enthusiastically valued.

00:19:54 Speaker_00
But what I kind of look at in AirCap, I think we have a really interesting convergence of a number of things. That is the biggest and best player in a space

00:20:05 Speaker_00
facing probably the most attractive industry conditions they've had for a while, while gushing cash, deploying that capital in the service of shareholders, trading at a compelling valuation with probably the best CEO in the business.

00:20:20 Speaker_00
But other than that, I guess maybe I'm lukewarm on the company.

00:20:24 Speaker_02
We can break down a few of those. So why are conditions good for an aircraft leasing company right now?

00:20:29 Speaker_00
So I don't know if you are aware, but we had this little thing called COVID in 2020 and 2021. Missed that one. Yeah, I was going to say, it would have been easy, right, if you weren't tuned into mainstream media 24-7.

00:20:42 Speaker_00
During the pandemic, obviously, air travel kind of ground to a bit of a halt. AirCap, which had been about a $65, $70 stock pre-pandemic, got taken out behind the barn and shot. I think it bottomed at like $12 or $14 or something.

00:20:58 Speaker_00
The first time I recommended it in Hidden Gems Canada was around $25, I think, if memory serves. And the thesis boils down to pandemic's end. Or if they don't, we have a whole host of problems, obviously, that don't really matter about investing.

00:21:16 Speaker_00
But the thesis was, look, pandemics end. And so what is the world looking like? Well, before the pandemic, before COVID, on a revenue passenger kilometer basis, an RPK basis, air travel grows about 5% a year, doubles about every 15 years.

00:21:36 Speaker_00
And I'm like, look, that's going to come back. We like to travel as a species, and we're going to do more of it. In fact, post-pandemic, it has been excellent.

00:21:45 Speaker_00
I think the most recent year is about 12% growth, but I expect we'll probably get back to that 5% thing on the long-term basis, and that's a good thing. That's just the first piece of thinking.

00:21:55 Speaker_00
The second piece of thinking, though, is that, look, here is this company that they're customers. They're buying from Boeing and Airbus, and they're leasing to, insert name of airline here.

00:22:08 Speaker_00
the airlines came out of the pandemic, I will argue substantially structurally weakened. And the airlines. I know this sounds weird to for for people or people don't think about this. Airlines don't really want to own planes. Yeah. Why is why is that?

00:22:26 Speaker_00
Because they're expensive. They are expensive. And we want our capital tied up in less assets like that. We prefer someone else owns the asset, that would be AirCap.

00:22:37 Speaker_00
And the airlines want to focus on running what is, I think we can all agree, a tremendously complex logistics business, right? Whether you're moving cargo or people or people as cargo, essentially, that's my last experience on Air Canada.

00:22:50 Speaker_00
they want to focus on the cost structure and running that business and lease payments, even though you're going to probably end up paying more in the long run for the assets.

00:23:03 Speaker_00
They are happy just to pay lease payments and take on maintenance contracts, whatever, and they're happy to pay that much smaller amount of money to a company like AirCap. There's a few other competing ones too.

00:23:14 Speaker_00
AirLease is another one, but I hold that AirCap is probably the best in this space.

00:23:19 Speaker_00
Essentially, it's the airlines looking to rationalize their capital and their cost structures, happy to push that off to someone else, and to someone else happens to be AirCap.

00:23:30 Speaker_02
In the past couple of years, they've taken about 20% of their existing share count off the market, going from that 240 number we said to about, we'll call it 190. So about, yeah, that's about 20.

00:23:41 Speaker_00
185 about now, 185 by now.

00:23:43 Speaker_02
We'll say, okay, we're not doing funny. It's about 20%. We gotta remember, I gotta remember people don't have notebooks out, Jim. Is this company trying to go private?

00:23:54 Speaker_00
Well, that's funny you asked that.

00:23:56 Speaker_00
About a year ago, I think it was actually almost, yeah, I think it was Q3 of 2023, an analyst on the call essentially said that and Gus Kelly basically said, yeah, at the current valuation, which by the way was at the time was trading at about 0.85, 0.9 times book value and about six and a half times earnings.

00:24:16 Speaker_00
Gus Kelly basically said, yeah, if we don't get a better valuation in the market, we're just going to keep buying ourselves. And at some point it will make sense to take ourselves private. He flat out said that.

00:24:25 Speaker_00
And that's, that's pretty rare to hear from a CEO. The valuation is slightly worse today. He's saying that with air quotes. I am saying that with air quotes. As of last week, I haven't looked this week.

00:24:38 Speaker_00
As of last week, the price to book ratio here was 1.06 and the price to earnings ratio was 8.2. Seems fairly cheap and I think that both of those numbers are wrong in the direction of being too conservative.

00:24:53 Speaker_02
Okay. And as we wrap up this segment, I know you wanted to talk about what debt means for a leasing company. Thoughts on that or anything else on AirCap as we, as we finally make this time for this aircraft leasing company on Motley Fool money.

00:25:06 Speaker_00
So if you pull up AirCap's quote today, you're going to see that this is a company that's about a 17, $18 billion market cap. And then you're going to pull open the balance sheet, you're going to see this company has $43 billion in debt.

00:25:20 Speaker_00
And a subset of people are going to freak out and go, oh my goodness, look at how much debt here, this is a ridiculous idea, Gillies is an idiot, and run away with their hands screaming. Thing is, when you're a lessor, debt is raw material to you.

00:25:36 Speaker_00
It's like steel for a carmaker, okay? They are deploying that into assets, in this case, planes or engines or even helicopters, but mainly planes. They're deploying it into assets that are readily redeployable.

00:25:51 Speaker_00
So if Mulvey Airlines decides to close down business, there's another airline there that will take the plane from you, will get it released really quickly. As well, they're saleable, and that's another thing that's going on with AirCap.

00:26:05 Speaker_00
They quite often will buy a new plane, and they'll run it for the first third to two thirds of its useful life. If a plane, on average, is good for 25 to 30 years, AirCap will run it for 10 to 15 years, say, and then they'll sell it. airlines.

00:26:24 Speaker_00
The interesting thing is they have been selling these planes. Historically, they were very good at selling these planes. They would sell them for about a 1.5 times book value. As mentioned, the stock today is selling for just over one times book value.

00:26:38 Speaker_00
But if you're able to sell assets for one and a half times book value, that implies a couple of things. The first thing it implies is that you've been over depreciating your existing assets.

00:26:48 Speaker_00
You've been taking too much depreciation expense, which has depressed your earnings down. Remember, this thing's only trading at eight times earnings, and those earnings are probably understated because of that over depreciation. The second thing is,

00:27:00 Speaker_00
If I can sell my planes for one and a half to two times book value, spoiler, the most recent quarter they were actually selling older aircraft at two times book value, what does that imply for the assets still remaining on your books?

00:27:12 Speaker_00
And I would argue it implies that because of that over depreciation, those assets are undervalued, at least reported there. And so I like to see what's going on with this company

00:27:26 Speaker_00
as they cycle capital through, and part of that is going to show up as debt. But you have to understand, debt is a raw material.

00:27:34 Speaker_00
It shouldn't be viewed as scary, because at the end of the day, let's say AirCap needed to pay off all their debt tomorrow, or at least in the near term. In theory, they could sell a bunch of planes. engines, helicopters, to pay off all the debt.

00:27:50 Speaker_00
Their portfolio is almost 3,500 airplanes, engines, helicopters. They could monetize far more than they're currently doing. The debt is not terribly a worry, frankly. I will close with this.

00:28:05 Speaker_00
One of my compatriots asked me this question when he was asking questions about AirCap and whether he should invest. And he says, well, you know, but what about macro conditions? What about the macro?

00:28:15 Speaker_00
You know, I'm not too sure I like the macro environment right now. There's some, you know, some pressures on the stock market, pressures on, you know, a recessionary talk in parts of the world.

00:28:25 Speaker_00
And I just looked at him and said, how much worse macro wise do you think it gets than shutting down the world for two years? And yet here is AirCap making all-time highs on the other side of that.

00:28:38 Speaker_00
Are you expecting we're going to shut down the world again? Because I suspect we're not. And if we don't, then here is this company again.

00:28:50 Speaker_00
Tremendous cash flows, super valuation, dominant place in their space, industry conditions in their favor, with the best CEO and capital allocator in the industry. Seems pretty good to me.

00:29:02 Speaker_02
All right, you know what? I'm glad we didn't do this on an A segment. You needed some runway for this one. Jim Gillies, thanks for your time and your insight. Appreciate you being here.

00:29:09 Speaker_00
Thank you.

00:29:16 Speaker_01
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

00:29:26 Speaker_01
All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening.

00:29:39 Speaker_01
We'll see you tomorrow, Fools.