Over the past six months, Air Lease has been a great trade. While the S&P 500 was flat, the stock price has climbed by 19.2% to $57.50 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Air Lease, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Air Lease Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Air Lease. Here are three reasons why there are better opportunities than AL and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Air Lease’s sales grew at a mediocre 6.4% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Air Lease’s margin dropped by 50.5 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. Air Lease’s free cash flow margin for the trailing 12 months was negative 80.1%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Air Lease burned through $2.25 billion of cash over the last year, and its $21.79 billion of debt exceeds the $456.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Air Lease’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Air Lease until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Air Lease isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 3.2× forward EV-to-EBITDA (or $57.50 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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