Description

FTAI was last written up on VIC on 1/9/2023 when the stock was $20.  Since then, the company has executed well, and the stock has risen to $37.  The Aerospace Products business is performing very well, due to strong adoption of the Module Swap offering.  While the stock is up substantially since 1/9/2023, in a way the stock is even more attractive today than it was back then because the customer value proposition of FTAI's module swap offering is more clear than ever, the external market environment is as favorable as it gets and likely to stay that way for another 2-3 years, and a clear path exists to the stock doubling over 1-2 years.

FTAI just recently posted Q3 2023 results, and they were very good.  The company reaffirmed 2023 guidance at the high end of its prior range and gave first time initial 2024 guidance.  I believe this guidance is very credible and conservatively biased.  Based on FTAI's 2022 and 2023 performance trends, guidance, and an analysis of the general market environment, I bleieve FTAI is set to deliver the following multi-year trajectory on its Aerospace Parts buisness:

This leads to the following outlook for the overall buisness:

This in turn leads to the following outlook in terms of price targets:

Two key drivers of upside over the next few years are: 1) continued robust growth of the module swap business, and 2) FAA approval of FTAI's PMA parts and the incremental EBITDA that will bring to the Module Swap buisness (broken out as a separate line item) and to selling those parts to 3rd parties (PMA JV EBITDA).

The historical and projected performance of the Module Swap business is as follows:

You can see that the module swap buisness has shown a steady and strong progression, and the momentum seems to be picking up.  I believe this is because the module swap offering has a very compelling customer value proposition and the offering is getting traction.  A very tight MRO makret, high annual price increases from GE/Safron on CFM56 engine OEM parts, and the need to service a large number of Pratt & Whitney's Geared Turbofan engines through 2026 all suggest that the external market environment for FTAI's module swap offering is going to continue to be very favorable and the value proposition will resonate more and more.

The other key thing that we need to see the potential 2x return over 2 years is we need FTAI's PMA Parts to get approved by the FAA.  FTAI has a JV with Chromalloy to produce 5 different PMA parts that go into the hot section of the engine (blades, etc).  The development and application for approval of these parts has been years in the making, but we are finally getting close to their getting approved.  My best guess is that the product will get approved in Q1 or Q2 of 2024.  The significance of PMA is 3 fold.  First and foremost, as soon as the PMA parts get approved, FTAI can start using them in the modules that they "produce" by servicing old engine modules and getting them back into new condition.  FTAI believes that once the PMA parts are approved and used for their module swaps, it will double their profit per module swap.  The profit per module swap was 500K in 2022, is estimated to be about 650K in 2023, and will be around 740K per module swap in 2024 without PMA.  I am assuming that PMA will add 600K per module swap on top of a base EBITDA per module swap of around 800K in years 2025 - 2027.  That generates the line item I showed above "Module Swap-- Extra EBITDA with PMA".

Another way PMA will help FTAI is through their 25% stake of a JV with Chromalloy.  The numbers aren't as big here, but there is some nice incremental contibution.

PMA will also make FTAI's leasing buisness more competitive and profitable.  By using PMA on the engines that FTAI leases to customers, the maintenance CapEx requirements will go down and the cash flows will go up for that buisness.  I have not factored in the upside from this component in my outlook.

Conceptually, it is helpful to realize the following.  The idea of using module swaps has been around for years.  However, until FTAI came onto the scene, they were done only by the largest airlines who had a big enough fleet and a large enough internal MRO operation to implement them.  Small and medium sized airlines didn't have the scale or do module swaps on their own.  What FTAI did is realize that they can bring module swaps to everybody else by establishing the position that they did in the market.  And there is a virtuous circle to being in the module swap business.  In many cases, when FTAI does a module swap, they are able to obtain an old module in need of service in exchange for the newly refurbished one that FTAI is selling.  FTAI is able to then perform MRO work on the old module to get it back into shape and then that module gets used for another module swap.  Also, not all modules get immediately refurbished.  There are 3 modules to a CFM56 engine-- the core, the fan, and the low pressure turbine.  Each of those 3 modules are rated for a certain number of cycles and the number is different for each module.  They are not perfectly in sync.  Sometimes when a customer does a module swap, they will swap out a module with 10K cycles to get one with 20K cycles to match the other two modules.  When FTAI picks up a module with 10K cycles, they don't immediately refurbish it... instead, they keep it in inventory to use for another customer who might be interested in putting a module with 10K cycles into one of its engines.  The ability for FTAI to be a central player and a hub for matching the flow of modules is unique and self perpetuating and has created a powerful value opportunity that isn't easy replicated by a new entrant.

I think the module swap business is just a great business.  We are now about 2 years into FTAI's launch of this offering, and the opportunity is proving out.  However, it is still early days, and there is a lot of growth left to happen.  And when the PMA parts get approved, the added profitability that that will generate will layer into whatever progress FTAI has made in building out the module swap business.

Catalyst

Continued customer adoption of "module swaps" and strong sequential growth in "Module Swap EBITDA".

FAA approval of FTAI/Chromalloy's 4 PMA Part submissions-- hopefully in Q1 or Q2 of 2024... this will add significant incremental EBITDA to the buisness.