AAR (NYSE:AIR) Exceeds Q3 Expectations

Aviation and defense services provider AAR CORP (NYSE:AIR) beat Wall Street’s revenue expectations in Q3 CY2024, with sales up 20.4% year on year to $661.7 million. Its non-GAAP profit of $0.85 per share was also 3.2% above analysts’ consensus estimates.

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"During the quarter, we continued to execute well across the company. We drove 26% organic growth in our new parts distribution activities, had strong operational performance in our hangars and saw a return to growth in our government business. The quarter also included meaningful contributions from Trax, and the recent Product Support acquisition continues to exceed our expectations," said John M. Holmes, Chairman, President and Chief Executive Officer of AAR CORP.

Company Overview

The first third-party MRO approved by the FAA for Safety Management System Requirements, AAR (NYSE:AIR) is a provider of aircraft maintenance services

Aerospace

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

Sales Growth

A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Unfortunately, AAR’s 2.7% annualized revenue growth over the last five years was sluggish. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. AAR’s annualized revenue growth of 15.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Parts Supply, Repair & Engineering, and Integrated Solutions, which are 37.7%, 32.9%, and 25.5% of revenue. Over the last two years, AAR’s revenues in all three segments increased. Its Parts Supply revenue (engine and airframe parts) averaged year-on-year growth of 17.1% while its Repair & Engineering (maintenance, repair, and overhaul services) and Integrated Solutions (fleet management) revenues averaged 27% and 15.8%.

This quarter, AAR reported remarkable year-on-year revenue growth of 20.4%, and its $661.7 million of revenue topped Wall Street estimates by 2.3%. Looking ahead, Wall Street expects sales to grow 13.6% over the next 12 months, a slight deceleration versus the last two years.

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Operating Margin

AAR was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.2% was weak for an industrials business.

On the bright side, AAR’s annual operating margin rose by 4.9 percentage points over the last five years.

In Q3, AAR generated an operating profit margin of 6.6%, up 2 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.

Earnings Per Share

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

AAR’s EPS grew at an unimpressive 6.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.7% annualized revenue growth and tells us the company became more profitable as it expanded.

Diving into the nuances of AAR’s earnings can give us a better understanding of its performance. As we mentioned earlier, AAR’s operating margin expanded by 4.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. For AAR, its two-year annual EPS growth of 16.3% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q3, AAR reported EPS at $0.85, up from $0.78 in the same quarter last year. This print beat analysts’ estimates by 3.2%. Over the next 12 months, Wall Street expects AAR’s full-year EPS of $3.41 to grow by 18.3%.

Key Takeaways from AAR’s Q3 Results

We enjoyed seeing AAR exceed analysts’ revenue expectations this quarter, driven by outperformance in its Integrated Solutions segment. We were also glad its EPS beat Wall Street's estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 3.8% to $71.70 immediately following the results.

Indeed, AAR had a rock-solid quarterly earnings result, but is this stock a good investment here?What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock.We cover that in our actionable full research report which you can read here, it’s free.