Crossroads Capital is long shares of FTAI Aviation Ltd (NASDAQ:FTAI).
Dear Partners and Colleagues,
Every so often, a company on our watchlist undergoes a negative event, sometimes self-induced and other times exerted upon it, that creates an opportunity to invest. What’s required to take advantage of the situation quickly is knowledge of the business beforehand (which is why we study businesses every day, despite not investing in them), a network to quickly diligence the issues on the ground, and visibility on a catalyst path that not only resolves the issues in the near term but also sets up market-agnostic returns over a multi-year period.
FTAI Aviation is such a company, and the stunning decline in the price of its shares following the Muddy Waters short report is such an event. While this writeup will not refute that report line by line, we believe it’s incorrect on many fronts. If events going forward line up with our thesis, we believe we’re investing in one of the best aerospace firms in the industry at a valuation equating to a single-digit multiple of next year’s EBITDA. In addition, the company has several catalysts that could drive earnings growth well above 25% per annum over the next several years. In fact, the current valuation is pricing in such low expectations that we could still generate a compelling return even if most of Muddy Waters’ thesis comes to fruition.
While we’re not presenting an in-depth business analysis of FTAI here, we’ll start with a simple history that should also illuminate why it was on our radar to begin with. Fortress Transportation and Infrastructure Investors started its life in 2015 as a partnership with Fortress Investment Group as the general partner (GP). When we first looked at it in 2019, it was best described as a well-managed collection of transportation assets including oil and gas pipelines, rail lines, port facilities, and aircraft/engine leasing.
In 2022, the company converted from a partnership to a true corporation and began initiatives to scale its Aerospace Products predominantly for the engine workhorse of narrowbody aircraft, the CFM56. These included a partnership with Chromalloy for PMA parts, another with Lockheed for MRO services, and one with AAR for engine salvage. The company then spun off its other infrastructure assets in 2022 and bought the QuickTurn Engine Center in 2023 and the Lockheed facility in 2024. Additionally, FTAI transitioned its executive organization in 2024 by terminating its management agreements with Fortress Investment Group for $150 million and cash and almost 2 million shares.
Finally, in December 2024 FTAI launched a Strategic Capital Initiative (SCI) with institutional private credit investors, planning to deploy over $3 billion annually to acquire 737NG and A320neo aircraft for leasing and then have the engines/module exchanges serviced solely through its own Maintenance, Repair, and Exchange (“MRE”) business. FTAI would be the GP, with earnings being capital-light since the company would only need to contribute minimal amounts to an off-balance-sheet entity.
FTAI therefore underwent a tremendous amount of change in a short period of time. From 2019 to 2022, its share price shifted around the mid-teens level. But after the spinoff in August 2022, it increased tenfold, from ~$17 to ~$175, as the business improved on every front.
With that quick background sketched in, we can now get to the matter at hand. On January 15, 2025, Muddy Waters published a short report alleging misrepresentation of sales, inflation of Maintenance, Repair, and Overhaul (MRO) margins (and margins in general), channel stuffing, and a few other accounting red flags. Less than a week later, FTAI announced that it might have to delay the filing of its 10-K to give its audit committee time to conduct an independent investigation into those allegations. The shares, at $175 in early January, plunged ~50% to the mid-$80s, and then largely stabilized below $100.
During this period, we went to work, reaching out to those familiar with FTAI’s former Lockheed facility, sourcing some industry practitioners, and going through every piece of material we could find on the company.
We quickly realized that lease accounting standards of the legacy business forced the reporting of Aerospace Products into unusual categories, adding unnecessary complexity but not indicating purposeful manipulation. Further, we diligenced the module business and concluded that Muddy Waters’ characterization of FTAI as “just a leasing business” was not accurate. A very real MRO business is being built on top of what was just a leasing business.
As for near-term catalysts, there were many:
- The company scheduled its Q4 call for the usual date, implying its 10-K would be published on time. We also had ample evidence that a clean 10-K publication would exonerate management.
- As of early February (as we’re writing this), FTAI has indicated it will transition to industrial accounting standards as soon as Aerospace Products generates over 50% of corporate EBITDA, which should occur in the next quarter or two. This change would quickly clear up any confusion on the accounting front going forward.
- The SCI was closing imminently, meaning $3 billion of capital should start deployment in 2026, increasing EBITDA by $150-$200 million regardless of market conditions. (An announcement on that would be positive.)
- FAA approval of the company’s third PMA part for the CFM56 is expected very soon. PMA parts are typically priced 50% below OEM parts. So, with that approval, FTAI’s engine module margins would structurally improve, and the company has 2 more PMA parts pending FAA approval.
- Finally, FTAI spent roughly $800 million on one-time capex in 2024, so cash flow should inflect upward this year regardless of other factors.
We believe FTAI, as a genuine engine MRO business with PMA parts widening its moat and led by savvy capital allocators should trade at a premium to peers valued between 20-25x EBITDA. Over time, we expect FTAI’s AP division to grow more rapidly than its leasing business, and, as such, the normalized multiple of the entire business would move closer to 20x EBITDA.
Now this is where it gets interesting: When we built our position at an average cost of $96.90 per share, FTAI was trading at ~8.5x 2026 EBITDA (excluding any uplift from the SCI), in line with lessor peers AerCap (AER) and AirLease (AL). This discount implied that the market believed the Muddy Waters report.
Even at current prices, the market is still largely pricing in the Muddy Waters short thesis, considering FTAI to be a traditional lessor and overlooking its transformation into a high-growth, capital-light engine MRO business with significant competitive advantages. But even if we’re wrong, we’d still own an aircraft/engine leasing company at a fair valuation.
However, if our thesis is correct, and FTAI continues executing on its strategic initiatives – including the SCI rollout, PMA part approvals, and industrial accounting transition – its earnings trajectory and multiple should rerate significantly. With EBITDA growth potentially exceeding consensus estimates by 20% or more, we see a path to a $290–$370 per share valuation, before potential buybacks.
In conclusion, the fallout from Muddy Waters’ short report on FTAI presents a special situation type opportunity for us to invest in an emerging aerospace market leader. Occasionally, there are events where speed is critical, but the ability to act swiftly on a potential opportunity must be balanced with a disciplined and thorough research process. If our analysis proves correct, FTAI remains deeply undervalued with substantial upside potential over a multi-year horizon, transforming into a long-term compounder from the special situation we originally entered.
Article by Crossroads Capital
