Even though I have already allocated a full position, and then some, to AAR Corp. (NYSE: AIR), the recent sell-off in the market, and with AAR in particular, is WAY overdone.

Sometimes you get a gift, and you would be crazy to not take it.

Various valuation metrics as well as my discounted cash flow analysis (DCF) show that AAR’s shares should be about 50-100% higher without even accounting for a recovery in the marketplace!

Add this to recent insider buying, and the stock trading below tangible book value, and at a severe discount to its peers, and you get a classic low risk, high reward proposition that is hard to pass up.

It might take weeks, or it might take months, but I believe AAR at these levels represents a true bargain on a valuable business with a proven management team and execution strategy.

What follows are my reasons for picking up another 1/4 position today.

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.

Time To Go Shopping!

Here are my 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, even in this current market. I went over their latest quarterly report in detail.
• As the current economy gets worse, more and more domestic airlines are outsourcing their MRO activities to cut costs and combat the rising price of fuel and the consumer slowdown.
• AAR is a diversified business, with a large chunk of their sales (40%) to the U.S. and other governments. Through this diversification, AAR can weather any economic storm better than other Aerospace and Defense companies.
• Insiders have begun to purchase shares of the company’s stock in moderate to large quantities over the last couple of months. This includes 5 different directors, and the CEO, David Storch, each purchasing anywhere from 4,000 - 24,000 shares at prices ranging from $10.20 - $17.16, with the most recent purchases being in the $10.20 - $12.60 range.
• Valuation metrics (more below) point to AAR trading below its peers, even though it has superior business fundamentals, and is a well diversified company with no direct competition for all 4 segments.
• AAR is trading below its fair book, and tangible book value by a wide margin, especially when compared to its peers (more below).

Now let’s take a look at some of those valuation metrics.

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