AAR (AIR) Earnings Watch: Is This Defense Stock a Golden Opportunity?

AAR (AIR) seems well-poised for robust growth in the long run due to the pipeline of commercial and government opportunities driving demand for its parts and services offerings, but fierce competition, regulatory risks, and low profitability reflect uncertainty around its near-term prospects. As AIR is set to release its second-quarter results tomorrow, let’s find out if it is an opportune time to invest in this defense stock. Read on….

AAR Corp. (AIR), a provider of aerospace and defense aftermarket solutions to commercial and government operators, MROs, and OEMs globally, is set to release financial results for its second quarter of fiscal year 2024, which ended November 30, 2023, after the NYSE trading session close on Thursday, December 21, 2023.

Analysts expect the company’s revenue and EPS for the fiscal 2024 second quarter to increase 18.9% and 15.6% year-over-year to $558.65 million and $0.80, respectively. Moreover, AIR topped the consensus revenue and EPS estimates in the last reported quarter.

The aviation services company posted first-quarter sales of $549.70 million, beating analysts’ expectations of $507.26 million. This is compared to $446.30 million in the same period of 2022. AIR witnessed solid growth across all its commercial activities.

In particular, AIR’s Parts Supply revenue rose 40% year-over-year due to investments made in previous quarters in expectation of strong demand. In addition, in Repair & Engineering, the company’s hangers were primarily full throughout the summer and flight hours continued to recover worldwide, which drove growth in Integrated Solutions.

Furthermore, the company’s EPS came in at $0.78, compared to the consensus estimate of $0.69 and up 27.9% year-over-year.

“We are proud to have delivered another quarter of year over year sales growth and record first quarter adjusted earnings.  Our commercial businesses are capitalizing on the favorable aftermarket trends and we expect that to continue in the quarters to come,” said John M. Holmes, Chairman, President and CEO of AAR Corp.

“We believe our pipeline of commercial and government opportunities, our strong balance sheet, and our ability to execute quickly will drive further growth across our parts and services offerings,” Homes concluded.

However, the company could face regulatory and industry-wide challenges. A significant portion of AIR’s revenue comes from government contracts, making the company vulnerable to changes in government expenditure and budget allocations. Also, it operates in a very competitive market, facing rigid competition from large aviation and defense companies and smaller industry players.

Shares of AIR have gained 7.7% over the past month and 30.8% over the past six months to close the last trading session at $72.28. Also, the stock has gained 62.1% over the past year.

Here are the factors that could affect AIR’s performance in the near term:

Positive Recent Developments

On December 11, AIR added distribution support of select Woodward, Inc. parts under its Supplier Capability Contact with DLA Aviation. Under this multiple-year deal, AAR Corp. will supply DLA with spare parts from Woodward’s fuel control product family.

AAR will offer comprehensive and integrated supply chain management support and perform associated functions to maximize the parts availability to DLA. Last year, AIR was the first non-OEM to be awarded the 20-year base Supplier Capabilities Contract with the Defense Logistics Agency (DLA), forming a strategic relationship to offer global supply chain support to the DOD and U.S. allies.

On December 7, AIR signed an agreement to extend the company’s existing airframe MRO services with Alaska Airlines through 2030 and expand its heavy maintenance partnership. The company has been committed to growing its dedicated airframe narrowbody capacity to provide Alaska Airlines with a minimum of six lines of maintenance support.

To support this, AAR Corp. plans to add a new three-bay hangar adjacent to its existing seven-bay facility at Will Rogers World Airport in Oklahoma City, pending final approval by the Oklahoma City Airport Trust. The proposed new hanger will offer AAR an additional 85,000 square feet of MRO space to accommodate all 737 variants.

Mixed Financials

For the fiscal 2024 first quarter that ended August 31, 2023, AIR’s revenue increased 23.2% year-over-year to $549.70 million, while its gross profit rose 23.7% from the year-ago value to $101.30 million. However, its operating income declined 18.9% year-over-year to $25.30 million.

AIR’s adjusted EBITDA rose 24.6% year-over-year to $52.10 million. The company’s adjusted income and adjusted earnings per share from continuing operations were $27.30 million and $0.78, up 23.5% and 27.9% year-over-year, respectively.

The company’s adjusted cash used in operating activities from continuing operations was $19.40 million versus an adjusted cash…