AerCap (NYSE:AER) and MasTec (NYSE:MTZ) are two of the top portfolio picks from Allspring Global Investments, the former Wells Fargo Asset Management.
The airplane leasing company and the clean energy industrial products company exemplify the “balance sheet” investing philosophy of the Allspring Global Invesments team.
Bryant VanCronkhite, CFA, CPA, is a managing director and senior portfolio manager for the Special Global Equity team at Allspring Global Investments.
Earlier, he was a mutual fund accountant for Strong Capital Management.
In this 3,608 word interview, exclusively with the Wall Street Transcript, Mr. VanCronkhite explains the unique investment decision making from the his team at Allspring Global Investments that lead to the AerCap (NYSE:AER) investment.
“Allspring Global Investments is the former Wells Fargo Asset Management.
About 18 months ago, the business was sold and we became an independent asset management firm offering an array of investment solutions with a mission to elevate investing to be worth more.
We have approximately $465 billion in assets under management spread among fixed income, money market, equity, stable value and multi-asset investment products.
We have about 1,300 employees including over 480 investment professionals. We have more than 20 offices across the globe…
The Special Global Equity team runs five strategies. The special mid cap value fund is our largest strategy, at just under $14 billion of assets under management.
The team has other strategies including a U.S. small cap value, U.S. mid cap value, U.S. large cap value, a global small cap and international small cap, all run by the same team with the same investment process in mind…
The investment philosophy was designed by Jim Tringas and myself, who are the team co-leaders. We built this philosophy with the idea that we have a very clear set of goals.
One, we want to deliver excess return versus our benchmarks and our peers.
Two, we want to have a very low risk profile while doing that.
And three, we want to be very consistent in order to make the path of outcomes less volatile for our clients.
In order to accomplish these goals, we felt it important that we first recognize that markets are relatively efficient. And if we’re going to achieve the goals including excess return, we have to identify a way where the market is inefficient and exploit that to ultimately create the value through stock selection.
One of the most important ways that we do that is by recognizing that the majority of investors spend their time analyzing the income statement, thinking about a historical perspective, revenues, margins and earnings, and extrapolate it forward to create a view of the future.
The market is very efficient at pricing historical events. The market can be very inefficient at times appreciating how a company can use a balance sheet to change the slope of the income statement in the future. And so, what we’re exploiting is the market’s unwillingness to properly price in the optionality of a company using their balance sheet in productive ways to create future value.”
One of our top holdings in the industrial sector is a company called AerCap (NYSE:AER). AerCap is the largest airplane leasing business in the world. Airplane leasing is done through passenger jets, but also planes for cargo. Anyone who is flying airplanes can either own the plane or lease the plane and AerCap is the largest player.
The competitive advantage here is really data and scale. Back in 2021, AerCap (NYSE:AER) completed the acquisition of GE Capital’s (NYSE:GE) air leasing business. Combined, the two businesses made AerCap the number one player.
It took place at a time when the market was very fearful. GE was going through a breakup of their assets. We were on the back end of a pandemic. And people were worried about air travel going back to its historical levels.
As a result, AerCap was able to buy those planes from GE, and that business from GE, at what we believe to be a very material discount to its fair value.
And so over time, as AerCap (NYSE:AER) goes through the normal course of business, replacing planes and selling them off at premiums, those sales should drive higher earnings and higher cash flow than currently priced in the market.
More importantly, on a run rate basis, being the largest player in the space, they have tremendous buying power, giving them access to new planes during a time when airplane production is remarkably low.
There isn’t enough supply to meet the demand for new planes.
Beyond that, their dataset of being the largest player allows them to have incredible insights on pricing. The key then is that it will help drive earnings and cash flow growth above what the market is expecting today.
And finally, this company is going to produce a significant amount of free cash flow over the next several years.
And as that free cash flow becomes available for use by flowing into the balance sheet, we think one of the key uses of that capital will be to buy back the shares from GE that GE received in the purchase of its business.
And as that happens, assuming the stock is still trading where it is today, which is well below book value, that should be highly accretive to the book value per share of AerCap and also likely generate meaningful increases in the earnings per share and free cash flow per share of business.”
Another example of the Allspring Global Investments style is MasTec (NYSE:MTZ).
“There is a company called MasTec (NYSE:MTZ). MasTec (NYSE:MTZ) helps build the infrastructure that drives the economy forward.
The Mas family founded this business.
Jose Mas, the CEO, has demonstrated incredible insights in how he uses capital to drive future value creation for investors. He uses acquisitions to push MasTec (NYSE:MTZ) in the crosshairs of where future growth is.
More recently, they spent capital buying companies in the clean energy space. They can become a key player in the installation of both solar and wind infrastructure equipment.
Beyond that, they’re a big player in the pipeline space for oil and gas — and increasingly for hydrogen.
They spend a fair amount of time installing wireless infrastructure for communications, including 5G exposure. And they also do a lot of transmission work as we build the grid and need to improve the grid’s stability.
Recent acquisitions came with projects that were poorly priced and thus have hurt margins in the near term.
But as we look forward, and when we start to price the value of the recent acquisitions into these more attractive spaces, we see margin expanding as poor projects work themselves through and as they gain market share.
The market still treats this company as a very cyclical stock.
We see demand being relatively visible given the important areas they are working in and the direct exposure to the key drivers of success for the U.S. economy over the next three, five and 10 years.”
Get the complete picture on the two top picks AerCap (NYSE:AER) and MasTec (NYSE:MTZ) as well as many others by reading the entire 3,608 word interview with the Allspring Global Investments portfolio manager, only in the Wall Street Transcript.