Aircraft leasing and maintenance firm AAR (AIR) released guidance on Friday that was much lower than consensus. For fiscal year 2013, the company expects earnings per share between $1.55 and $1.65, but the consensus estimate called for earnings of $2.15 per share. We suspect this weakness can be mainly attributed to weakened defense spending amid worries about the government's budget deficit. Specifically, the firm noted that it expects to take $4 million in restructuring charges and take another $9.5 million charge as a result of lower profits on the KC-10 tanker support contract. We expect a number of the large defense contractors like Lockheed (LMT), Northrop Grumman (NOC), and Raytheon (RTN) to feel the pinch in government outlays in coming periods as well.
Still, AAR noted that in its fourth quarter, sales to commercial customers expanded an impressive 40% (including 13% organic growth). The company also provided an optimistic outlook for commercial aviation demand during 2013. By extension, we still like a number of aerospace suppliers thanks to their heavy exposure to commercial plane-building. Namely, we hold Precision Castparts (PCP), Astronics (ATRO), and EDAC Technologies (EDAC) in the portfolio of our Best Ideas Newsletter. We believe these three firms are better investment opportunities than AAR on the basis of their more attractive Valuentum Buying Index ratings.
Additional disclosure: Some of the companies mentioned in this article may be included in our actively-managed portfolios.