Willis Lease Finance (WLFC) has agreed to purchase three commercial buildings in Coconut Creek, Florida, for US$118.0 million. The acquisition is directly tied to its expanding headquarters, spare parts, maintenance, and engine storage operations.

The recent purchase agreement and new engine storage deal with Pratt & Whitney come after a sharp pullback, with Willis Lease Finance’s share price falling around 18% over the past month despite a much stronger year to date and multi year total shareholder returns.

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Willis Lease Finance is clearly investing for growth with new facilities and a fresh Pratt & Whitney agreement while the share price has pulled back. Is a solid aviation lessor now attractively valued, or is it already fully priced?

Price to earnings of 15x for Willis Lease Finance: Is it justified?

Willis Lease Finance closed at $61.05, and on a P/E of 15x it trades at a lower earnings multiple than both the wider US market and its Trade Distributors peers.

The P/E ratio compares the current share price with the company’s earnings per share. For a lessor and servicer of aircraft and engines such as Willis Lease Finance, it gives a quick sense of how much investors are paying for each dollar of profit.

Here, the company’s 15x P/E is below the US market average of 19.3x. It is also below the US Trade Distributors industry average of 27.4x and the narrower peer group average of 80.4x. This gap suggests the market is applying a lower price tag to Willis Lease Finance’s earnings than to many similar companies, even though the stock has delivered a 23.5% total return over the past year and has been profitable over the last five years, with net profit margins currently at 11.4%.

The contrast between a 15x P/E for Willis Lease Finance and a peer average multiple above 80x is stark, and it points to very different expectations being priced into similar businesses.

Result: Price-to-earnings of 15x (ABOUT RIGHT)

However, investors still need to weigh risks such as any slowdown in revenue growth from US$754.297m and potential setbacks in the new Pratt & Whitney partnership.

Another view on Willis Lease Finance using our DCF model

There is a very different picture when looking at Willis Lease Finance through the SWS DCF model. On this measure, WLFC at $61.05 is trading well above an estimated future cash flow value of $9.76, which points to the stock being heavily overvalued on this method.

This gap between earnings based valuation and cash flow based valuation raises a practical question for investors. Which set of assumptions feels more realistic for how Willis Lease Finance might generate cash over time, and how much risk are you comfortable taking if the higher price is not supported by future cash flows?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Willis Lease Finance for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 51 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mix of positives and risks around Willis Lease Finance feels finely balanced, it makes sense to move quickly and check the underlying data yourself so you can form an informed view. Start by weighing both sides of the story with 1 key reward and 3 important warning signs

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.