AAR Corp – Your Best Stealth Airline Stock to Buy in 2015

Advertisement

Passengers as well as investors tend to give aircraft maintenance, repair and overhaul (MRO) little thought. However, the aviation industry’s wrench-turners are the behind-the-scenes heroes who keep aircraft in the air — and MRO is a source of long-term profit that often flies under the radar among airline stock investors.

aar corp air 185The leader in this “stealth” industry is AAR Corp. (AIR), which provides MRO products and services to commercial, government and defense customers. AAR buys, sells, leases, repairs, and overhauls airframe parts, including cockpit avionics and electronic, fuel and hydraulic components.

Headquartered in Wood Dale, Illinois, AAR employs 5,800 people in 17 countries at 60 locations around the globe. Little-known outside of its industry, this company is a colossus among its peers and ranks as the biggest independent MRO provider in the United States by annual man-hours generated. AAR is the largest, publicly traded direct play on MRO growth — and thus an airline stock worth a look.

Demand for MRO is particularly strong these days, as the aviation sector enjoys one of its greatest upswings since the end of World War II. Now that the Great Recession of 2008-2009 is receding into the distance and economies around the world are recovering, consumers are opening their wallets for plane tickets and airlines are dipping into their coffers to make long-deferred repairs and upgrades.

Temporary Turbulence

But before it reaches full cruising speed, AAR must first fly past a few air pockets. AAR recently reported operating results that, while down on a year-over-year basis, carried the seeds of future growth.

AAR announced second quarter fiscal year 2015 revenue of $490 million and earnings of $15.2 million, or earnings per share (EPS) of 38 cents. For the same period a year ago, the company reported revenue of $540.7 million and earnings of $20 million, or EPS of 50 cents.

Although earnings and revenue both declined, the company remains a good bet in 2015 as the aviation sector’s resurgence continues apace.

To be sure, within the company’s Aviation Services segment, revenue dipped 11.1% year-over-year to $377.7 million. This is the segment whereby wrench-turners actually work on aircraft operated by airlines; demand softened largely because of recessionary relapses throughout Europe. However, economic conditions on the Continent should ease in the coming year as central banks and governments pursue less austerity and more stimulus.

It’s important to note that in the same quarter, supply chain sales to commercial and defense customers racked up double-digit growth. During the quarter, the company also scored several contract wins that will bear fruit in coming years. AAR renewed a five-year agreement with Allegiant Air, operated by Allegiant Travel Co. (ALGT), largely for maintenance of its fleet of Boeing (BA) 757 aircraft. Boeing’s airplanes are a major recipient of AAR’s services and the Chicago-based manufacturer is enjoying huge demand for its products.

AAR also won a $49 million contract in the quarter from the U.S. Navy, Naval Supply Systems Command, to provide search and rescue airlift services in West Africa. Aviation Services’ gross profit margin rose to 16.9%, up from 16.8% in the same period a year ago, reflecting the company’s cost-cutting efforts and supply chain efficiencies.

A tightly run supply chain, booming demand in aviation, and a massive unmet need for MRO work on aging aircraft give AAR plenty of potential lift in the coming months.

AAR stock also is a good value, sporting a trailing 12-month price-to-earnings (P/E) ratio of 16.7, below the trailing P/E of 17.7 for its sector of aerospace/defense products and services. Pent-up demand for MRO in the commercial and defense industries is likely to emerge full-force in 2015, giving this industry leader plenty of momentum to soar above the crowd.

As of this writing, John Persinos did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/aar-corp-airline-stocks/.

©2024 InvestorPlace Media, LLC