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On Thursday, September 27, analysts at Zacks upgraded shares of AAR Corp. (AIR). The firm raised its rating on the stock from a Neutral to an Out Perform and set a $19/share price target. As a result of the upgrade, shares of AIR reacted quite positively, closing up 1.60% over the last two trading sessions. In the wake of the company's recent upgrade, I wanted to examine AAR Corp. and highlight how it compares with some of its industry-based competitors within the Aerospace & Defense sector, in terms of profit and operating margin, and earnings performance. The two companies within the sector that I chose to compare alongside AAR Corp. are Lockheed Martin Corp. (LMT) and General Dynamics (GD).

Margin Comparisons

As a whole, and in my opinion, the Aerospace & Defense sector possesses some of the lower profit margins I've seen from a sector-by-sector standpoint. With that noted, I wanted to demonstrate the fact that although AAR Corp. has a respectable profit margin over the last year and especially among its sector-based peers the company still has a ways to go before it can compete with companies like Lockheed Martin Corp. and General Dynamics.

Let's begin by examining the operating margins of the companies I've chosen to feature within the Aerospace & Defense sector and begin by noting the fact that although AAR Corp. is the laggard of the group, there is certainly room to grow in terms of operating margin. Over the last year, AAR Corp. has demonstrated an operating margin of just 6.44%, which was outpaced by both Lockheed Martin (which demonstrated an operating margin of 8.33%), and General Dynamics (which demonstrated an operating margin of 11.97%).

Next let's move on to the profit margin comparisons. In the last 12 months AAR Corp. has demonstrated a profit margin of just 3.26%, which was outpaced by Lockheed Martin (which demonstrated a profit margin of 5.96%), and General Dynamics (which demonstrated a profit margin of 7.55%). AIR has the ability to demonstrate a substantial increase in its domestic and international business, as well as improve on its current profit and operating margins, over the next 12-24 months, due in part to the company's first-quarter earnings, which surpassed estimates signifying the continuation of positive growth for the company within the sector.

Should potential investors consider a position in ARR Corp. based on the company's improvement in terms of quarterly earnings? To survive among some of the biggest name within the Aerospace & Defense sector, one must possess a solid track record when it comes to quarterly earnings. The recent earnings performance of the company demonstrates the fact that AIR has the ability to not only meet but significantly exceed analysts' expectations.

During the August 2012 quarter, AIR was expected to only earn $0.39/share, however the company reported EPS of $0.45/share, which exceeded estimates by 15%. It is in my opinion, that most recent quarterly announcement by AAR, in which the company demonstrated a solid performance in terms of EPS, that strongly signifies a much needed turnaround by the company and has set the pace for future earnings to perform right in-line or much better than expected.

Potential investors looking to establish a position in the company should do so with a small- to medium-sized position and add to that position as both earnings and dividend dates approach. A similar strategy should also be implemented if potential investors are looking to establish a position in either Lockheed Martin or General Dynamics. It should also be noted that LMT and GD have outpaced AIR in terms of EPS in each of the last four quarters.

Source: 2 Reasons I'm Considering A Position In ARR Corp. At Current Levels