Earnings Preview: AAR Corp.

AAR Corp. (AIR) is slated to release its second quarter of fiscal 2011 results on December 15. The current Zacks Consensus Estimate for the second quarter earnings per share is 36 cents, 2 cents above the year-ago quarter and a penny above the previous quarter.

First Quarter Highlights

AAR Corp. posted upbeat results for the first quarter of fiscal 2011 based on the huge leap in revenue from the Government and Defense Services attributable to the acquisition of Aviation Worldwide Services (AWS) in April 2010.

Aviation Worldwide Services (AWS), a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments, was acquired from Xe Services LLC for $200 million.

During the quarter, net income was $13.7 million or EPS of $0.35, up 34.3% from the net income of $10.2 million or EPS of $0.27 in the corresponding period of fiscal 2010. Reported EPS beat the Zacks Consensus Estimate of $0.30.

Revenues were $412.2 million, a 20.7% increase from $341.5 million in the first quarter of fiscal 2010 based on three times the revenue generated from the Government and Defense Services segment compared with the year-ago level. Total revenue was well above the Zacks Consensus Estimate of $372 million.

Revenues in the Government and Defense Services segment reached $129.3 million from $36.3 million in the first quarter of fiscal 2010. Organic revenue growth was 2.0% year over year.

The increase was primarily driven by the AWS acquisition, which added five aircraft to its fleet. Another reason for the rise in revenue is the growth in the company’s defense logistics business driven by the contract for USAF’s KC-10 fleet in February 2010.

For details please click on: AAR Corp. Posts Upbeat Results

Second-Quarter 2011 Outlook

Management did not provide guidance for the second quarter of fiscal 2011. However, eight analysts covering the stock expect second quarter EPS at 36 cents and revenue at $411 million.

For fiscal 2011, management expects EPS within $1.25 to $1.40 and revenue in the range of $1.5−$1.6 billion. However, the Zacks Consensus Earnings Estimate for fiscal 2011 remains at $1.51 per share and revenue at $1.658 billion, above the management’s guidance.

AAR Corp. has beaten the Zacks Estimate as borne out by the earnings surprises in the preceding four quarters. In all the last four quarters, it recorded positive surprises with an average positive earnings surprise of 8.89% over the last four quarters, meaning that the company has beaten the Zacks Consensus Estimate by that measure.

The Zacks Consensus Estimate has remained stagnant over the last 30 days, with none of the analysts moving in either direction, leaving the consensus unchanged.

Our Take

The AWS acquisition, which added five aircraft to its fleet, is expected to be accretive to earnings and margins in fiscal 2011 and beyond. It is anticipated to generate $175 million of revenue on an annual basis.

Moreover, now that the markets are picking up gradually, we expect the company to perform well due to its industry leading supply chain and MRO positions. IATA expects the airline industry to make a profit of $2.5 billion in 2010, which is a positive indication for the stock.

Over the longer term, we maintain our Outperform recommendation on the stock. The stock at present retains a short-term “Buy” rating, equivalent to a Zacks #2 Rank.

AAR CORP (AIR): Free Stock Analysis Report

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