AAR Corp.: Earnings Preview

| About: AAR Corporation (AIR)

AAR Corp. (NYSE:AIR), a provider of products and services to the aviation and defense industries, is scheduled to report its first-quarter fiscal 2011 financial results on September 15, 2010, after the market closes. The current Zacks Consensus Estimate for the quarter is 29 cents a share.

Fourth Quarter Summary
During the quarter, AAR Corp. recorded a 21.9% decrease in net income to $11.1 million from $14.2 million in the year-ago quarter. Earnings per share (EPS) were 29 cents, 7 cents below the reported EPS in the same quarter of the previous year and a penny below the Zacks Consensus Estimate of 30 cents. The decline is attributable to the increase in operating costs during the quarter.
Sales were $372.3 million, marginally up from $371.7 million in the fourth quarter of fiscal 2009. Sales to defense and government customers represented an 82.0% growth year over year and reached $80.5 million from $44.2 million in the same period of 2009.
This huge growth stems from the supply chain services and logistics support contract for USAF's KC-10 fleet in February 2010 and the acquisition of Aviation Worldwide Services in April 2010. USAF's KC-10 fleet business became fully operational in the fourth quarter.
For our detailed analysis, please see: AAR Corp. Reports in Line
First-Quarter 2011 Outlook
Management did not provide guidance for the first quarter of fiscal 2011. However, nine analysts covering the stock expect first quarter EPS at 29 cents and revenue at $370 million.
For fiscal 2011, management expects EPS within $1.25 to $1.40 and revenue in the range of $1.5−$1.6 billion. Zacks Consensus Earnings Estimate for fiscal 2011 remains at $1.40 per share and revenue at $1,561 million, well within management’s guidance.
The Zacks Consensus Estimate has remained stagnant over the last 30 days, with none of the analysts moving in either direction, leaving the consensus unchanged.
With respect to earnings surprises, AAR Corp. had a positive track record in the preceding four quarters. In all the last four quarters, it recorded positive surprises with an average positive earnings surprise of 6.72% over the last four quarters, meaning that the company has beaten the Zacks Consensus Estimate by that measure.
Our Recommendation
We are optimistic about the acquisition of Aviation Worldwide, a leading provider of expeditionary airlift services and aircraft modifications to the U.S. and other governments. The acquisition is expected to be accretive to earnings and margins in fiscal 2011 and beyond and to generate $175 million of revenue on an annual basis.
Moreover, the company is expected to perform well once the market recovers due to its industry leading supply chain and MRO positions. New products, equipment and methods will also help the company get numerous beneficial contracts.
However, the increase in net debt and uncertain macroeconomic conditions are matters of concern. Moreover, the cyclical nature of the aviation industry, huge capital requirement and fluctuating fuel prices put the company on Hold. Over the longer term, we maintain our Neutral recommendation on the stock. The stock at present reiterates its short term “Hold” rating, equivalent to a Zacks #3 Rank.