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FTAI Aviation (NASDAQ:FTAI) shares were subjected to a severe hammering recently after the aircraft leasing firm got in the crosshairs of a short seller.
A report by Muddy Waters Research accused FTAI of engaging in financial manipulation and deceptive accounting practices. The report alleged that the company overstated the scale of its aftermarket business, misrepresented whole engine sales as sales of individual modules, over-depreciated leasing assets to artificially inflate Aerospace Products (AP) margins, and engaged in channel stuffing.
In response, FTAI denied the allegations. However, the timing could not have been worse. The company admitted that the accusations – landing just as it was preparing its audited financial statements for fiscal year 2024 – could potentially delay the filing of its annual report.
The market reacted swiftly, with the stock plummeting 45% since the release of the short-seller report.
However, not everyone is convinced the report holds water. BTIG analyst Andre Madrid remains bullish on FTAI’s prospects.
“Despite the market reaction, we remain positive on the company’s disruptive aftermarket approach and ability to drive further profitability at the Aerospace Products business,” the analyst said.
After speaking with management, Madrid says FTAI clarified its depreciation policy: assets are not depreciated until they enter service or are leased, a policy “consistent throughout the entire company.” The company considers three factors regarding depreciation: cost (the acquisition price), residual value (updated semiannually via third-party appraisals verified by auditors and adjusted for each module’s usage), and useful life (estimated time from lease start to the next shop visit). On average, engines in FTAI’s leasing core have depreciated by about 20% of their useful life. Unlike lessors like AerCap and Willis Lease Finance, FTAI typically acquires engines with shorter useful lives (2-6 years versus 15-20 years).
Additionally, Most of FTAI’s recently acquired leasing equipment consists of unserviceable engines. All intact engines, whether serviceable or not, are categorized as leasing equipment upon acquisition. Recently, FTAI has focused on acquiring unserviceable engines, which are often parted out to supply modules and components for the Aerospace Products operation. Whole engines are only sold after being reworked, not simply transferred from the Leasing segment.
Madrid remains a big FTAI fan, claiming the company is still in a “league of its own with its MRE business model.”
“Valuing FTAI in isolation either as a lessor, maintenance, repair, and overhaul (MRO) shop, or aftermarket/Parts Manufacturer Approval (PMA) provider neglects the value and synergies of having all under one ‘roof’, in our view,” the analyst went on to say.
All told, Madrid rates FTAI shares a Buy, alongside a $190 price target, implying the stock will gain ~127% over the coming months. (To watch Madrid’s track record, click here)
FTAI retains the Street’s full support. Based on Buys only – 12, in total – the stock claims a Strong Buy consensus rating. The $189.67 average target is only slightly below Madrid’s objective and factors in a 12-month gain of 126%. (See FTAI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.