ELAL is a high-quality, underfollowed asset trading cheaply (2.3x EV/EBITDA) with strong downside protection due to net cash, owned fleet, and loyalty program value; wartime monopoly dynamics provide asymmetric upside.

We're talking about LL Airlines. I hope I said that right. It's the Israeli national airlines is basically what it is. And he's got a thesis, you know, downside protection, lots of assets, the interesting pricing structure, interesting competitive dynamics, all that type of stuff.

But, before we get to that, the company we want to talk about today is El Al. This is Israeli Airlines is what I think of them in my head, but I'll stop rambling. I'll turn it over to you and I'll say, "What is El Al and why are they so interesting?"

And you can tell me if I'm saying it wrong as well.

So, yeah, El Al is the Israeli flag carrier. It was started 1948 when they founded the country, and then it was privatized um in the last 20 years. And you know, the story to cut to the chase is since October 7th of 2023, there's been this um almost continuous disruption in their market.

There's been flight There's been carriers from Europe that have been flying on and off, but you basically have the situation where they've um been able to you know, command this like leading market share.

And they've delevered the balance sheet. And we're still in the midst of a war and it trades like really cheaply on an absolute relative basis.

And you know, I think it's a very high quality asset. Type of thing that's going to be around 30 years from now. And the market is, you know, scared out of its mind, but I feel like it's a very asymmetric setup because of the quality of the balance sheet and the you know, the current setup that we find ourselves in and love to like walk you through the story.

Yeah, so a few things. Number one, I think just to start with the obvious, it's kind of this this stock is pretty underfollowed. It happens to be that only half of it is publicly traded.

During the middle of COVID, there was an equity essentially an equity recap. The Israeli government really did not bail the airline out. They provided some loans, but an investor came in a US investor and essentially like bought, you know, half the you know, between warrants and warrants.

Although warrants are now fully converted, so the the we're looking at a fully diluted market cap right now. All the shares outstanding, there's 592 million shares.

But it truly is underfollowed and underappreciated. If you look at the front page, there are basically no US hedge funds. The top holders are all Israeli insurance companies. And so you guys kept going and say like, you know, there are deleveraging something that's on the balance sheet like we say that it's not been appreciated, but like I really think in this situation the deleveraging is so unprecedented and it's so significant because they've been able to just have three years of windfall profits that they've totally delevered the balance sheet and now they're like, well, you know, very overcapitalized.

They're returning capital to shareholders. And that's, you know, that's a unique setup.

Like it's very hard and, you know, we're we're we're talking about an airline in the middle of a war with, you know, jet fuel like it was spiking, you know, like it was up 86% last quarter.

El Al still managed to like generate a lot of free cash flow. So that's part of the story here is that they've already proven that they're even profitable with the commodity going against them.

So, that's number one. Like in terms of the deleveraging and that speaks to the valuation. Trades at like 2.3 times EV to EBITDA, you know, generated a lot of free cash flow. So, like there's just like an absolute cheapness and a in a deleveraged balance sheet.

So, you're not to worry about any balance sheet issues.

Number two is I think the market doesn't appreciate that there that you know, the inbound Ben Gurion is like being completely transformed after 3 years of war and we're still in the midst of the conflict with Iran.

The most important change which has been permanent. I'm not saying it won't change. There will be there won't be other carriers that will come in, but Turkish Airlines and Pegasus which were top five carriers, they totally left the market. They're not coming back.

And then on demand side, you know, like El Al has won the trust. They're the only ones that have been able to consistently fly. There's been this on again, off again literally for 3 years.

Kind of get I don't want to use the word flywheel. I don't overstate it for an airline cuz it's commodity. They're all flying the same planes. But at the end of the day, there is some lock-in with like the loyalty program and like people that just want surety that they're not going to have their tickets canceled which has happened.

I mean, it's happened to friends, you know, almost happened to me. I was there in May. People are going to want to fly El Al and so that speaks to the pricing power and the in you know, the inelastic demand that they that they enjoy in in their unique, you know, in their niche.

You know, you mentioned over the past few years that the company has rode kind of wartime profits to uh really deleverage the balance sheet. They've gone from a net debt position to a huge net cash position.

So, I guess my first thought would be, "Hey, they kind of delevered through a supernormal profits, and we can get to profits later, but does that really work?" And that would kind of go to the second thing I'd say where they've got this big net cash position, but a lot of it is from customer float, right?

Customer prepaid. And yes, they're not canceling flights, but you you mentioned it. The Israeli government didn't bail them out during COVID. And go ask all the airlines how they feel about relying on like a balance sheet made up of customer float when the customers might cancel.

And here they might cancel because of a COVID, or they might cancel cuz the war goes breaks out even further, and nobody wants to travel, or they can't travel safely, they can't launch flights safely.

So, I guess I look at this balance sheet and I say, "Hey, I I I see two errors that like companies or that I've looked at or companies have made in the past that this balance sheet kind of rests on.

That's not say it's going to go bankrupt, but if we're relying on that for the valuation, could that prove a problem?"

Yeah, so let's talk about the balance sheet. And so, like the way they talk about it, they, you know, they have there's over $2 billion in available funds for liquidity. About 1.3 billion of that is called air traffic liability, which is basically an interest-free loan from their customers cuz people buy the tickets in advance.

So, even excluding that and assuming that it normalizes, and it will someday, but you know, they've been enjoying this float for the last 3 years, they still have a significant net They still have a you know, significant net cash um position on their balance sheet.

So, that's number one. Number two is it's a real asset. It's just like it's pretty extraordinary. I was looking, you know, they just printed their second quarter. Like they had I think it was like here in the income statement, there was like they had $31 million in like in like net finance It was like positive where the last you know, Q2 last year was like negative four That's a $35 million shift just in the financing line.

And part of that is they've been able to buy out um nine aircrafts over the last since 2025. They basically bought them out of off of lease, and that's much better longer term.

So, like you know, I I would just point to the things that are permanent. Like so, like you know, assuming the ATL normalizes fine, they're still going to have a cash balance. They're still going to have They're still going to own 80% of their fleet.

Like 2 years ago it was like it was only 50% of the fleet.

And I feel like that you know, you know, those those two And the most important thing though is I think about this all the time. You're right. Like this screams This thing is over-earning, right?

Like how could you not be concerned that there's going to it's going to mean revert, and the stock's not going to work because it's just going to be very difficult.

And I I think that I would I would point back to like their last clean year, which was really sandwiched between COVID and the and the war on October 7th was 2023. And in 2023, like they were profitable, you know, after CapEx, after leases, after, you know, amortization of loans.

So, and they to the tune of like 100 to 200 million dollars in free cash flow. So, I kind of look at it like that. Like, worst-case scenario, I you know, that let's say they go back to that.

Like, you're looking at a $2 billion EV and normalize, you know, at least 150 to 200 million in free cash flow, I feel like I'm willing to take that bet.

Um but like, I don't think I think that's going to be low because they permanent they they've added a lot of capacity. Um it's not clear how much capacity they've added because some of it is uh wet leases.

So, those wet leases are, you know, they're temporary leases that they have, but that's the minority of it. That's the minority of it. The majority of it is just, you know, they've added to their fleet.

Let's turn to valuation a little bit more, right? So, your write-up again the the killer line and people should go read the write-up. It's at the end, but the killer line you have is, "Hey, our the downside here is supported by they've got the 1.3 billion of net cash that we talked about.

They own a lot of their planes and go look at plane prices." Like, owning planes the all these planes are in the money. You say, "Hey, they own a billion plus of planes and they've got an external valuation on their branded credit card program that's and loyalty program that's worth 700 millionish."

So, that's 3.5 billion in kind of hard asset value versus an EV of you depending on how you keep treat the cash, 2 billionish, right? So, you're buying it at a substantial discount.

And because of like multiple multiple wars on multiple fronts, actual there's an actual missile that hit Ben Gurion last year. It was like and El Al has found itself in this basically monopoly position on the transatlantic flight.