Al Root

Shares of aerospace-aftermarket services provider FTAI Aviation took it on the chin Wednesday after a short seller published a negative report about the company.

There were allegations of improper accounting, but the report boils down to business perception and valuation. One Wall Street analyst defended the stock in the aftermath of the selloff.

FTAI owns and leases aircraft and aircraft engines, and repairs aircraft engines. The company does a lot of work on CFM56 engines. The CFM56 is one of the best-selling engines in the history of commercial aviation powering single-aisle aircraft for both Boeing and Airbus.

It's been a good business. Reported sales, helped by acquisitions, grew 25% annually from 2019 to 2024. Reported operating profit grew about 21% annually.

Wednesday, research firm Muddy Waters published a report about FTAI alleging, in part, that whole engine sales are characterized as module sales to inflate reported volume, and that some expenses are moved around on the income statement to inflate Ebitda profit margins.

Ebitda is short for earnings before interest, taxes, deprecation, and amortization and is frequently used by industrial analysts to value companies and evaluate balance sheet strength. Where expenses are reported, of course, don't impact bottom-line earnings and cash flow.

Muddy Waters is short FTAI stock. Short sellers borrow shares they don't own and sell them, betting that the price falls so they can buy back stock at a lower price in the future to return to the original owners. The less they have to pay to replace the shares, the more money the short sellers make.

FTAI didn't immediately respond to a request for comment about the report.

FTAI reported positive cash from operations, cumulatively, between 2019 and 2024. Free cash flow has fluctuated as capital spending has gone up and down. FTAI is buying assets to lease and resell.

What's more, companies that buy assets, and refurbish and resell them are a little different from companies that make things or provide business services. Refurbishers recognize some cash flow in a different part of the cash flow statement, explains accounting expert Robert Willens, as those companies record noncash gains in the income statement and reconcile gains and losses through the cash-flow statement. Willens isn't making a call on FTAI's accounting. He is explaining why its financial statements are a little different.

Many of Muddy Waters' concerns can be boiled down to how FTAI stock is valued. The research firm believes it is mainly a leasing business. Investors view it more as a maintenance, repair, and operations, or MRO, entity.

Shares of aircraft lessor Air Lease trade for about 11 times estimated 2025 earnings per share. FTAI shares -- before the report -- traded for about 34 times estimated 2025 earnings. After Wednesday's drop, shares were trading for about 22 times.

The two firms, of course, have different balance sheets, assets, and growth profiles.

Citi analyst Stephen Trent called Muddy Waters' claims "a little hard to understand" in a Wednesday report. He doesn't see a problem between module and whole engine sales. "With three modules equating to one CFM56 engine, it would not seem improper to describe module sales in engine equivalents," wrote Trent, adding he isn't aware of any quality complaints from customers.

Trent rates FTAI stock Buy with a $190 price target. That's almost 65% above where shares closed on Wednesday, after the report had an impact.

Shares opened Wednesday above $157, and tumbled below $95 before closing at $116.08, down 24% on the day. The drop still left shares up about 141% over the past 12 months.

One reason for the long-term outperformance is the strength of the aerospace aftermarket. Both Boeing and Airbus are having trouble making enough jets. That leaves the existing fleet flying longer, needing more maintenance along the way.

Wall Street, along with Trent, still likes FTAI stock. Twelve out of 13 analysts, or 92%, who cover the shares have Buy ratings, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for FTAI stock is about $191.

FTAI stock was up almost 11% at $128.60, while the S&P 500 was up 0.1% and the Dow Jones Industrial Average was flat.

Investors should expect some more volatile trading in the coming days as Wall Street scrutinizes the Muddy Waters report.

Write to Al Root at allen.root@dowjones.com

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(END) Dow Jones Newswires

January 16, 2025 11:09 ET (16:09 GMT)

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