AAR Corp. Sell-Off Presents Immediate Buy Opportunity

Even though I have already allocated a full position to AAR Corp. (AIR), the recent sell-off in the market, and with AAR in particular, is WAY overdone.

Various valuation metrics as well as my discounted cash flow analysis [DCF] put AAR about 70-100% below fair market value.

It might take weeks, or it might take months, but I believe AAR at these levels represents a true bargain on a rapidly expanding business with a proven management team and execution strategy.

Here are some other quick reasons why it’s prudent to add to your AAR position or start one immediately:

• AAR’s most recent earnings announcement and conference call exceeded expectations, and was as solid as can be. I went over their latest quarterly report in detail.
• AAR continues to further accelerate their business and enter into new markets with prudent acquisitions and margin expanding initiatives.
• AAR recently announced another acquisition (a full update will be forthcoming), that adds another Maintenance, Repair and Overhaul [MRO] facility to their portfolio in Miami, bringing to 4 the total number of MRO servicing centers and further expanding their most profitable and rapidly expanding business segment.
• This furthers their strategy to service more and more government aircraft, and in particular, domestic airlines that are outsourcing their MRO activities to cut costs and combat the rising price of fuel.
• My recent follow-up and conversations with AAR have confirmed that things are on-track, and that nothing is amiss, other than a stock market correction and overreaction in this industry in particular.
• I believe that AAR’s upcoming fiscal 3rd quarter (February 2008) earnings report will be solid and above expectations, providing a catalyst for the shares.

Some quick valuation metrics:

• Discounted Cash Flow [DCF]: Using my model, I get a fair or intrinsic value for AAR of anywhere from $45-$60 per share using extremely conservative assumptions: Upside potential of 73%-131%.
• Using TRAILING P/E: AAR’s historical 4-year trailing P/E ratio has always been between 20 and 30, today it sits at 16.5. This number will lower further in a few weeks when AAR reports 3rd quarter earnings: Upside potential of 21%-82% (not including further upside with Q3 earnings).
• Using FORWARD P/E: AAR’s forward P/E ratio for fiscal 2008 is $1.75 per share, or 14.86, and $2.28 per share or 11.4 for fiscal 2009:Upside potential of 35%-102% using 2008 values ONLY.
• Using Price to Earnings Growth (PEG): AAR trades at a forward P/E ratio of 14.86, while expected to grow earnings 20% over the next 5 years, a PEG of .743. Anything under 1 is considered “cheap”. Upside potential of 35% (using a PEG of 1) - 62% (using a PEG of 1.2).

The Bottom Line

I believe that the recent sell-off that began in conjunction with the overall market malaise, is an overreaction and gives patient and well-researched investors like us, a fantastic opportunity to round out our full position in AAR at phenomenal prices.

I’ve said many times, and I’ll say it again: anything under $30 a share for AAR is a bargain (AAR’s recent price was $26.00), and you should add shares to your portfolio for long term investment immediately, and add more shares on any weakness below this level.

Disclosure: Author has a long position in AIR

Comments

[RazzBerry]

Wow, so many problems with your argument, I hardly know where to start. Let me sum up: Higher costs, lower revenues.
Costs first: Jet fuel is at an all-time high and going higher. The pilots are angry and will not settle for anything less than big wage increases in next year's sure-to-be-bitter contract negotiations. American's entire MD-80 series fleet (almost half the total) needs to be replaced.
Revenues: Airlines always exaggerate the business cycle. The coming recession will soften demand, and ticket prices will tumble as airline execs chase "market share".
I notice that all of your information comes from AMR company reports and press releases. It's little wonder, then, that you are dumbfounded by the falling share price. Try a little research not produced by execs with a vested interest in the share price going up.

[PeakStocks.com]

Hey RazzBerry,

You have the wrong company. I am reporting on AAR (Ticker: AIR) NOT AMR!!

Totally different company, and focus.

Please re-read my article, and also click through to my website to read my full research report on AAR. I think you'll be pleasantly surprised at how truly cheap this stock is.

Remember, AAR has NOTHING at all to do with flying people across the country, only with repairing the planes, and replacing the parts for those airplanes.

Chris

[RazzBerry]

Hey Chris,

A thousand pardons! I was absolutely in the wrong. I sincerely apologize. I don't know a thing about AAR, and will be more careful in the future.

I would avoid airlines, though.

Sorry about the snark!

Razz