AAR Corporation: Flying High

A few days ago, AAR Corporation (AIR) reported 4th quarter and FY 2007 results. Results were slightly ahead of analysts’ expectations, which seems to be par for the course for this company. Fourth quarter revenue rose 22% to 305.7M, net income from continuing operations rose 33% to 17.7M, and diluted EPS from continuing operations rose 31% to 0.42. Full year revenue rose 20% to 1.06B, net income from continuing operations rose 66% to 59.4M, and diluted EPS from continuing operations rose 48% to 1.42. The diluted share count rose 11% over the course of the year.

The one disappointment in these results is a smaller-than-hoped-for increase in operating margins. Operating margins increased to 9.2% (versus 8.4%) for the quarter and to 9% (versus 7.4%) for the year. The company fell short of its goal to reach an operating margin of 10% in 2007. The company did say that it is on track toward a 10% operating margin for 2008 and still expects to achieve its longer-term goal of a 12.5% operating margin within the next three years.

The balance sheet shows cash of 83.3M, down from 121.7M a year ago. Long term debt stands at 327.9M, up from 320.9M a year ago. Stockholders’ equity is 494.2M, up from 422.7M a year ago.

The last 4 years have seen nice growth in revenue, net income from continuing operations, and diluted EPS from continuing operations.

Revenue:

2004: 644.5M
2005: 747.8M (16% increase)
2006: 885.5M (18% increase)
2007: 1.061B (20% increase)

This translates to a compound annual growth rate of 18% over the last 3 years and a CAGR of 19% over the last 2 years.

Net Income from Continuing Operations:

2004: 4.6M
2005: 18.6M (304% increase)
2006: 35.8M (92% increase)
2007: 59.4M (66% increase)

This translates to a compound annual growth rate of 135% over the last 3 years and a CAGR of 79% over the last 2 years.

Diluted EPS from Continuing Operations:

2004: 0.14
2005: 0.55 (293% increase)
2006: 0.96 (75% increase)
2007: 1.42 (48% increase)

This translates to a compound annual growth rate of 116% over the last 3 years and a CAGR of 61% over the last 2 years.

Unfortunately, the press release does not contain a cash flow statement, making valuation difficult at this time. For now, we have the following considerations:

Share price: 34.28
Diluted shares outstanding: 41.9M (this is the share count used to compute diluted EPS in the earnings release).
Market cap: 1.44B
Cash: 83.3M
Long term debt: 327.9M
Enterprise value: 1.68B
EV/revenue: 1.6
PE: 24
Analysts’ growth estimate: 20% per year over the next 5 years
PEG: 1.2
Return on equity: 12%

Disclosure: Author has a long position in AIR

AIR 1-yr chart