We have upgraded our recommendation on AAR Corp. (AIR) from Underperform to Neutral based on the Aviation Worldwide Services (AWS) acquisition, which is expected to be accretive to earnings and margins in fiscal 2011 and beyond.
The new acquisition has already started laying eggs with the increase in the total aircraft backlog, which increased to approximately $597,700 compared with $492,500 at the end of the previous year.
Aviation Worldwide Services (AWS), a leading provider of expeditionary airlift services and aircraft modifications to the U.S. and other governments, is expected to generate $175 million of revenue on an annual basis. In the long term, the acquisition is also likely to expand its products, services and capabilities to the government in the United States and abroad from where the company generates significant amount of its revenue. During fiscal 2010, AAR Corp. generated 14.4% of total revenue from government and defense services.
AAR Corp. is also able to maintain a satisfactory competitive position through its unique combination of market expertise and technical and financial capabilities in each of its four reportable segments, which can also drive the company ahead of its competitors. The company’s direct competitor is Goodrich Corp. (GR).
AAR Corp. is expected to perform well once the market recovers due to its industry leading supply chain and MRO positions coupled with its series of cost reduction initiatives. Besides, new products, equipment and methods will also help the company to achieve numerous beneficial contracts. For fiscal 2011, revenue is expected in the range of $1.5 to $1.6 billion and EPS within $1.25 to $1.40, an increase of approximately 15.0% and 14% respectively from the fiscal 2010.
However, an uncertain macro economic condition, the cyclical nature of the aviation industry, huge capital requirement and accelerating fuel price puts the company on hold. The stock retains its Zacks #3 Rank (short term “Hold” rating).