AAR's 2013 Outlook Disappoints On Defense-Related Restructuring

| About: AAR Corporation (AIR)

Aircraft leasing and maintenance firm AAR (NYSE: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 (NYSE:LMT), Northrop Grumman (NYSE:NOC), and Raytheon (NYSE: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 (NYSE:PCP), Astronics (NASDAQ:ATRO), and EDAC Technologies (NASDAQ: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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Some of the companies mentioned in this article may be included in our actively-managed portfolios.