AAR Corporation: Flying High With Steady Growth

| About: AAR Corporation (AIR)
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AAR Corporation (NYSE:AIR) is a leading aviation support company serving the aviation/aerospace market by providing products and services in four major areas:

1. Supports a broad range of commercial and military customers with aircraft and engine parts as well as related services.

2. Provides support for customers’ aircraft maintenance, repair, and overhaul needs, as well as aircraft storage and teardown services.

3. Designs and manufactures customized in-aircraft cargo loading systems for the aviation and transportation industries. Also manufactures and repairs custom pallets, containers, and shelters used by the U.S. government and its allies for tactical deployment activities.

4. Provides guidance in sourcing, purchasing, and remarketing aircraft and provides a wide range of technical services including aircraft evaluations, borescope inspections, lease and return condition analysis, aircraft and engine record audits, asset management, and document preparation and storage.

The company’s customers include large commercial airlines, regional airlines, cargo carriers [FedEx (NYSE:FDX), United Parcel (NYSE:UPS)], manufacturers and maintenance providers [Boeing (NYSE:BA), General Electric (NYSE:GE), L-3 Communications (NYSE:LLL), Northrop Grumman NOC], the U.S. government, and various foreign governments. More information on the company, its products and services, and its customers can be found on its website.

As of February 28, 2007, the balance sheet shows cash of 105.1M and long-term debt of 307.1M. Total stockholder’s equity is 469.7M.

The last 3 years have seen nice growth in revenue, net income, and earnings per share.


Just a few days ago, the company reported the results for 3Q fiscal year 2007. For the first nine months of FY 2007, net sales were 755.5M and income from continuing operations was 41.7M, or $1.00 per diluted share. Sales increased 19% compared to last year, and income from continuing operations grew 86%.

Here are some considerations which might aid in determining a suitable buy-in point.

Market cap: 1.12B

Current share price: 30.20

PE ratio: 23

Analysts’ growth estimate: 20% per year over the next 5 years.

PEG: 1.2

Enterprise value: 1.32B

FY 2007 owner earnings run rate: 55.5M (computed as net income + D&A – total capex)

EV/OE: 24

(EV/OE)/G: 1.2

Let’s compute a DCF fair value. Here are the assumptions used in the DCF calculation:

1. Owner earnings: 55.5M

2. Growth rate in years 1-5: 20%

3. Growth rate after year 5: 3%

4. Discount rate: 11%

Under these assumptions, we obtain a DCF value of 32.39. The current price represents a 7% discount to this DCF fair value.

Disclosure: Author has a long position in AIR

AIR 1-yr chart