BUY ALERT: AAR Corp (NYSE: AIR) BUY 1/4 Position 3/3/08 Around $26.00
What:
I am initiating the fourth (4) BUY recommendation of AAR Corp (NYSE: AIR).
Why:
Even though I have already allocated a full position to AAR Corp., the recent sell-off in the market, and with AAR in particular, is WAY overdone.
Various valuation metrics as well as my discounted cash flow analysis (DCF) put AAR about 70-100% below fair market value.
It might take weeks, or it might take months, but I believe AAR at these levels represents a true bargain on a rapidly expanding business with a proven management team and execution strategy.
Here are some other quick reasons why it’s prudent to add to your AAR position or start one immediately:
- AAR’s most recent earnings announcement and conference call exceeded expectations, and was as solid as can be. I went over their latest quarterly report in detail.
- AAR continues to further accelerate their business and enter into new markets with prudent acquisitions and margin expanding initiatives.
- AAR recently announced another acquisition (a full update will be forthcoming), that adds another Maintenance, Repair and Overhaul (MRO) facility to their portfolio in Miami, bringing to 4 the total number of MRO servicing centers and further expanding their most profitable and rapidly expanding business segment.
- This furthers their strategy to service more and more government aircraft, and in particular, domestic airlines that are outsourcing their MRO activities to cut costs and combat the rising price of fuel.
- My recent follow-up and conversations with AAR have confirmed that things are on-track, and that nothing is amiss, other than a stock market correction and overreaction in this industry in particular.
- I believe that AAR’s upcoming fiscal 3rd quarter (February 2008) earnings report will be solid and above expectations, providing a catalyst for the shares.
Some quick valuation metrics:
- Discounted Cash Flow (DCF): Using my model, I get a fair or intrinsic value for AAR of anywhere from $45-$60 per share using extremely conservative assumptions: Upside potential of 73%-131%.
- Using TRAILING P/E: AAR’s historical 4-year trailing P/E ratio has always been between 20 and 30, today it sits at 16.5. This number will lower further in a few weeks when AAR reports 3rd quarter earnings: Upside potential of 21%-82% (not including further upside with Q3 earnings).
- Using FORWARD P/E: AAR’s forward P/E ratio for fiscal 2008 is $1.75 per share, or 14.86, and $2.28 per share or 11.4 for fiscal 2009:Upside potential of 35%-102% using 2008 values ONLY.
- Using Price to Earnings Growth (PEG): AAR trades at a forward P/E ratio of 14.86, while expected to grow earnings 20% over the next 5 years, a PEG of .743. Anything under 1 is considered “cheap”. Upside potential of 35% (using a PEG of 1) - 62% (using a PEG of 1.2).
The Bottom Line
I believe that the recent sell-off that began in conjunction with the overall market malaise, is an overreaction and gives patient and well-researched investors like us, a fantastic opportunity to round out our full position in AAR at phenomenal prices.
I’ve said many times, and I’ll say it again, anything under $30 a share for AAR is a bargain (AAR’s recent price was $26.00), and you should add shares to your portfolio for long term investment immediately, and add more shares on any weakness below this level.
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*Variables You Should Know About AAR Corp. (NYSE: AIR) |
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|---|---|
| The Company: | AAR Corp. provides products and services to the aviation, aerospace, and defense industries worldwide. It operates in four segments: Aviation Supply Chain; Maintenance, Repair, and Overhaul (MRO); Structures and Systems; and Aircraft Sales and Leasing. |
| Why Buy Now: |
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| Market Cap: |
$981.7 |
| Revenue (TTM): |
$1,190.00 |
| Cash/Debt: |
$40.1/ $368.6 |
| Current Price: | $26.00 |
| Risk Rating (?): | 5 (Average) |
| Position Size (?): | 1/2 (10-22-07), 1/4 (1-8-08), 1/4 (1-9-08), 1/4 (3-3-08) |
| Buy Around Price (?): | $30.00 (10-22-07), $34.00 (1-8-08), $31.25 (1-9-08), $26.00 (3-3-08) |
*As of 2-29-08. Except share price, all values in millions.
(1 votes, average: 5 out of 5)
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(2) comments to “BUY ALERT: AAR Corp (NYSE: AIR) BUY 1/4 Position 3/3/08 Around $26.00”
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Seeking Alpha Gold Certified Contributor
March 3rd, 2008 at 3:25 pm
I really hope you’ve factored in a significant downturn in air travel with your DCF analysis. Imo, we are about to enter a very tough recession, and I fear this cyclical stock will take a beating, perhaps not to recover for some years. A look at the price of this stock over the past 20 years nicely demonstrates this. AIR was selling for 30 bucks a share in 1998 at its last peak. It was 2007 - almost 10 years later - before that price was reached again!
Yes, past performance is no indicator of future performance. Still, this is a cyclical industry, and buying at the peak can easily halve your investment in a short amount of time. As shown, it can take a decade for the price to recover.
I think a lot depends on the macroeconomic environment, and that seems terrible to me. And, more importantly, likely to deteriorate even further…. I’m just waiting for another rate cut to really juice up inflation, requiring a significant tightening in the money supply later this year. That could be the final straw for the economy, and the death knell for a cyclical stock of this type.
Caveat emptor. I really hope I’m wrong.
–JC
March 3rd, 2008 at 9:17 pm
JC -
Excellent observations, let me comment on them:
- Even if air travel drops significantly, it will have NO impact on AAR. Let me explain in more detail why:
First of all, AAR’s MRO facilities are already at almost full capacity, only prevented from reaching full capacity because of the lack of qualified and skilled mechanics. AAR is addressing this problem, and intends to hire an additional 400 workers at their Indianapolis MRO facility ASAP.
Recent quotes from management also indicate that they are LOSING business because they can’t service all the work that they have available to them.
So, as the economy slows, and less people travel (there will be a natural resistance at the lower end as people will always need to travel), and the airlines look to consolidate, and ratchet back expenses, they will further outsource their MRO to companies like AAR, which is now the #7-8 player in this space, not including their other 3 segments!
- You are correct in mentioning that AAR is a cyclical stock, at least it has been.
AAR has taken steps in the last 3-5 years to prevent this cyclicality by acquiring more and more businesses that compliment their military components of their business, which acts as a shield if/when their commercial customers come up on hard times.
This has created a business that relies less and less on commercial airlines, and more on the military which is more stable and always needs the services that AAR provides.
This downturn won’t be like others, and AAR has taken steps to make sure that’s the case with their acquisition strategy and customer mix.
- Finally, you are missing the point of the full detailed analysis and research that I have performed on this company.
If you read my research reports, AAR operates 4 separate segments: MRO, Aviation Supply Chain and Parts, Structures and Systems, and lastly, Aircraft Sales and Leasing.
On their last earnings call, and from the further follow-up that I have gotten from talking to AAR, I can tell you that they are executing their strategy beautifully, and making prudent acquisitions that are accretive to their earnings, never dilutive.
To your point as to the stock’s decline after each correction, this is precisely the reason that AAR has modified their business strategies going forward.
They are a more mature business now, with sales topping 1.2 BILLION in the last 12 months.
At this level, they are not dependent on any one revenue stream, and have diversified that revenue stream to prevent the type of cyclical declines in their stock price and sales that have occurred in the past.
Like I said, as more and more MRO is offloaded to companies like AAR, even a downturn in the economy and less demand for flying, still won’t impact their MRO operations that are already filled to capacity and looking to expand (which they did with a recent acquisition) and take on more of this business.
Bottom Line:
Nothing is guaranteed in any investment. I could be totally wrong, and AAR could be totally wrong in their assessment of where their business is, and what could happen, but so far, they have BEAT estimates every single quarter but 1 for the last few years.
If they keep that up, and continue to grow sales at their above-industry pace, it won’t matter what macro-economic factors are taking place, because AAR will be executing their growth strategy to the point that the results will force investors to reconsider their position on AAR and what might happen to it under the current environment we are in.
Today’s price in retrospect will look like a nice bargain for those who did their homework and research.
Chris