Don't show againNews Bites for Thursday December 11th: GeoEye Wins Large Contract, AAR Earnings Preview
New to the AAR story?
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.
Through its Aviation Supply Chain and MRO segments, AAR provides everything from aircraft parts, maintenance and logistics support, to the actual maintenance and repair of aircraft at its 4 MRO facilities at various locations throughout the U.S.
In addition, through its Structures and Systems segment, AAR provides vital products and services to the U.S. military including specialized construction of mobile shelters and pallets, as well as support and products for various military aircraft and aircraft support, storage and maintenance functions.
Finally, through its Sales and Leasing segment, AAR buys, sells and leases used aircraft for itself, on behalf of others, and through joint ventures.
Want More?
- Read: My latest company analysis and quarterly earnings breakdown here.
- OR: Read why I recently added to my AAR position by clicking here.
Looking Ahead to AAR’s Earnings
What Went Right In the Quarter?
Quiet on the home front
Aside from a few minor deals with the US government for some additional orders, AAR has been extremely quiet on the home front this quarter.
There have been no major announcements either good nor bad, and if it weren’t for the gyrations of the company’s stock price, there really wouldn’t be much to talk about.
On that note, I did issue a buy recommendation earlier this quarter for AAR at or around $11.75 per share, which is looking great now with the stock trading around $16.00 (still too low, but more in-line with where it should be).
In addition, I was waiting to see validation and confirmation from those inside the company in the form of insider buying, which took place at prices ranging from $10.20 - $17.00 per share, with the CEO purchasing 10,000 shares at the lowest price.
In that post I outlined the reasons for my purchase, including AAR trading way below book and tangible book value, and way lower than its peers even though the company is in much better shape than others within the aerospace and defense industry.
That validation has so far come to fruition.
What Went Wrong in the Quarter
Continued weakness in airline industry
There’s no doubt that AAR’s numbers have come down in terms of growth projections for the coming year, but the best part is that AAR is still growing!
This is all organic growth and has shown no signs of slowing down because AAR is truly the best in class in this market, and delivers such a powerful value proposition to its buyers and customers, that they don’t need to go elsewhere.
Even in the face of higher fuel prices, which have since come way down, and decreased consumer air travel, AAR’s sales, margins, and guidance remained strong throughout, and not only met, but beat those lowered expectations of Wall Street.
This isn’t just a 1-2 quarter phenomenon, but well into 1 year now where AAR has repeatedly matched or beaten estimates with no large revisions in their forecast aside from that of the overall airline market.
What I Want to See
In line results would just fine please
AAR is projected to earn $.49 per share this quarter, and based on their past record, I expect them to meet or beat that number.
The same goes for the top line sales figure.
Where I want to see significant improvement, is in the cash flow statement, where AAR was turning things around and paying off debt, before last quarter when they went backwards.
The overall trend, and what AAR is focusing on, is profitability, free cash flow generation, and paying down some of their debt, while keeping costs under control, and increasing margins.
I want to see this transpiring.
What We Need To See
No Surprises
I would think that the market is perhaps braced for some potential bad news, and have been for quite some time, with AAR.
I think that anything within reason (slight slowdown, etc.) is fine, as long as there are no jarring missteps, or revisions.
What We’ll Probably See
Smooth landing
From the day I started covering AAR, I have been impressed with the consistency and competence of the management team.
David Storch, the CEO, has guided AAR through all kinds of crises’ in the past including rough times in the 80’s, 90’s, September 11th, and the current economic crisis.
Through it all, AAR has always come out on the other side stronger, with a better balance sheet, and more prepared for the coming years, while many of their competitors floundered or failed all-together.
I expect more of the same calm, collected leadership that we’ve seen in the past.
Bottom Line
Could be slow going, but AAR will be fine
AAR might be a little cautious in their outlook and view for the future, but nonetheless, the company remains on solid footing.
Their diversified portfolio of services to both foreign and domestic customers, as well as the US government, shield them from the malaise in the credit markets and the decline in airline spending which has slightly hit their MRO division.
AAR is poised to keep up the good work that they are known for and I don’t expect this quarterly results period to yield anything different from what we have come to expect.
New to the AAR Story?
- Read: My latest company analysis and quarterly earnings breakdown here.
- OR: Read why I recently added to my AAR position by clicking here.
|
*Variables You Should Know About AAR Corp. (NYSE: AIR) |
|
|---|---|
| Current Recommendation: | STRONG BUY |
| 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: |
|
| Market Cap: |
$628.83 |
| Revenue (TTM): |
$1,440.00 |
| Cash/Debt: |
$100/ $517 |
| Current Price: | $16.00 |
| Risk Rating (?): | 6.5 (Above Average) |
| Position Size (?): | 1/2 (10-22-07), 1/4 (1-8-08), 1/4 (1-9-08), 1/4 (3-3-08), 1/4 (10-24-08) |
| Buy Around Price (?): | $30.00 (10-22-07), $34.00 (1-8-08), $31.25 (1-9-08), $26.00 (3-3-08), $11.75 (10-24-08) |
*As of 12-10-08. Except share price, all values in millions.
Pages: « previous page 1 2next page »
(No Ratings Yet)
Loading ...
(7) comments to “News Bites for Thursday December 11th: GeoEye Wins Large Contract, AAR Earnings Preview”
Leave a Reply
PeakStocks.com welcomes and encourages reader comments. Add your voice to the discussion whether you agree with me or not.
December 11th, 2008 at 10:06 am
Thanks for your reply the other night.
I am simply shocked by the lack of interest in the GEOY SLA news. Maybe investors are waiting to hear about calibration before they buy but given the volume today there seems to be a lot of selling pressure. Maybe the contract is baked in as the analyst discusses below. I completely disagree that the SLA revenue is baked in and here is what I’m coming up with. Wondering if you are coming up with the same but it all comes down to the flow through of the SLA to the bottom line.
Love to get your value for the company assuming calibration goes as we all hope it will.
I’m running the numbers applying the SLA on a trailing 12 basis assuming a 50% flow through, not including any $ from commercial contracts. GEOY is recognized as having one of the best net margins of its peers at 24%. I’m hoping my flow through is conservative but I’m guessing a % of that $12.5MM from the SLA won’t be incremental revenue. I’m coming up with $61/share based on a 10 P/E (to be conservative). Factoring in the new business model to resell images and then adding the untapped commercial clients to the existing commercial contracts, the P/E should easily be higher. On top of that, the gov’t indicated that it will double the amount of imagry they buy from us and DG.
—
SNPMarketScopeResearchNotes2008-12-11 11:20:55.000GEOYGEOEYE INCR-Khalid-CFAS&P REITERATES HOLD RECOMMENDATION ON SHARES OF GEOEYEGEOY shares are trading up 4% this morning, we think reflecting the company’s new one-year service level agreement with the U.S. government, which is valued at $150M. Revenue from the agreement is based on the operational launch of the GeoEye-1 satellite, which we expect to occur in late 2008. Our sales and earnings estimates for the rest of ‘08 and ‘09 already assume the impact from the new SLA contract. We maintain our target price of $20, blending an enterprise value-to-sales ratio of 2.7X on our ‘09 sales projection of $180M and our DCF analysis that yields $22.|US;GEOY|17381|222770
December 11th, 2008 at 10:29 am
Chris, I am and many in my investor cohort are simply stunned at today’s price action. Since the open, there has been a near 10% correction straight downwards. This after the announcement of one of the most positive developments in company history. I just wanted to get your thoughts on the S&P Hold Reiteration, since to me and the investors I have discussed this, the opinion below is farcical, at best.
They said this, “Our sales and earnings estimates for the rest of ‘08 and ‘09 already assume the impact from the new SLA contract. We maintain our target price of $20, blending an enterprise value-to-sales ratio of 2.7X on our ‘09 sales projection of $180M.”
For one thing, I completely take issue with their contention that the SLA is baked into the stock price already. With the stock moving from 29 after launch to 19 before the announcement, this statement smacks of more than just a mite of mendacious prestidigitation.
For another, their revenue projection is just awful, imo. They see ‘09 revenue at 180 million, including the new SLA. So, ancillary revenue from Google, additional buying from the NGA, contracts with other governments, sales from partners like Telespazio aborad, sales to fishing fleets and commercial entities of that ilk with interest in these images, etc. etc. are only predicted to account for 30m in ‘09 revenue.
Truthfully, that sounds like absolutely atrocious analysis. Assonance aside, what are your thoughts about this? Where do you project revenues at for ‘09? Am I off base in my abject disgust with and wholesale disagreement with this reiteration?
Thanks in advance for your reply. Happy investing!!
December 11th, 2008 at 5:09 pm
Michael,
I am actually quite happy with GeoEye’s move today to be honest.
The Russell 2000 was down about 5%, while GeoEye was up 1.5%, that’s an outperformance of 6.5% in one day. That’s remarkable, and if you extended that out for 10 days, you would be up 65% over the market! When you put it in perspective, it’s a huge move against these heavy headwinds that we face in the market today.
AS for your valuation, I think that it is way too high, because of the mere fact that GeoEye will be amortizing the cost of the GeoEye-1 satellite as a COGS line item, which will crush their EPS, but flow through to their cash flow and free cash flow figures, which is what matters, and why when you value GeoEye you need to look at EV/EBITDA, and not anything else.
On this basis, GeoEye is still dirt cheap, and in fact their market cap is way below the entire cost of GeoEye-1 of $500 million, that’s what I’m looking at currently.
The stock has to get above that before I would even consider it even close to “fair” value.
I also believe that the analyst’s model that you cite are way too conservative, and they are way off base, and should be valuing the company much higher, and their DCF model seems extremely conservative at best.
Chris
December 11th, 2008 at 5:13 pm
Nick,
See my comments to Michale above.
You and I and Mike all agree..this analysis is way off base, and to be honest with you guys, whenever I see any analysis or stock recommendations by S/P I turn my head.
They are usually late to the party, whether up or down, and their analysis is not as good as you or I could dig up on our own, and with a little common sense and a good head on our shoulders.
There is no way that GeoEye’s revenue is only $180 million next year…other anlysts have pegged it to be much higher, whether that sticks or not remains to be seen, but I do know that $180 is way too low.
Something around $200-220 seems more than reasonable with a much higher margin, and cash flow, would yield a huge windfall for GeoEye’s coffers and profits.
Chris
December 12th, 2008 at 7:40 am
Thanks for the response.
Yikes. GEOY is down 6x the market as of this message. I know the market is crazy right now but come on. I guess I’ll be concerned if we continue this trend when the calibration is announced. Not sure what else can be said as once that announcement is made, I couldn’t think of a better company to invest in for 2009 for all the reasons you’ve discussed in your articles.
December 18th, 2008 at 6:23 am
I’m not worried but the activity yesterday in GEOY was crazy. Increased volume with huge selling pressure and then a big buy of December $17.50 calls. Are you worried about the amount of institutional ownership here? It looks like someone is taking advantage of the down days to liquidate part of their position pushing the stock down hard. However yesterday 10K calls were bought at the same time.Interesting.
I don’t see the selling pressure as people nervous about GEOEYE-1. I’m not an expert on the software issues, but from what I read I’m not that concerned.
What is your take on this odd movement in the stock and are you concerned about the amout of institutional ownership?
December 18th, 2008 at 11:59 pm
Michael,
Yea, GeoEye has taken it on the chin here the last couple of days.
If I didn’t already have 3/4 of a position, I would buy more, but like I’ve said before, since I am already fully invested, I won’t commit more capital until GeoEye-1 is delivering usable imagery.
The institutional ownership in GeoEye changes so frequently, that it isn’t even worth tracking.
The selling could be some institutions selling their shares to lock in gains before the new year, or for tax loss selling, bot are possibilities depending on when they bought shares.
Either way, I don’t pay attention to the day to day movement in a stock, unless there is something to pay attention to.
Is the downward movement because someone knows something about GeoEye-1? If they do, it’s illegal.
Chris