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We have maintained our long-term Neutral recommendation on Illinois-based aerospace/defense products and services supplier AAR Corp. (AIR - Analyst Report) on Oct. 8, 2013.

Why Kept at Neutral?

AAR has maintained a satisfactory competitive position through its market expertise as well as technical and financial capabilities across segments.

The company recently reported mixed first quarter fiscal 2014 results. Its bottom line surpassed the Zacks Consensus Estimate driven by efficient cost management. However, a decline in sales at the Technology Products division hurt the top line. Again, sales to commercial customers declined 6.1% year over year during the first quarter of fiscal 2014. The company however expects it to return to growth in the second quarter of fiscal 2014.

Backed by operating strength and robust market demand, the company expects Aviation Services segment revenue to grow year over year in the second quarter. The company expects sales of mobility products to remain flat with the prior year for the balance of the fiscal. Moreover, the company’s continued focus on cost management and higher operational efficiency across several of its businesses has and will continue to improve its margins.

The company has a strong balance sheet, which can help it to expand its operations further. It reduced net debt by $109 million on a year-over-year basis in the first quarter of 2014.

Sales to branches, agencies and departments of the U.S. government and their contractors were $763.2 million or 35.7% of consolidated sales in fiscal year 2013. The company mainly supplies products and services that support U.S. Department of Defense logistics and mobility strategy and also offers supplemental airlift services. Hence, the current political impasse in the U.S. might have a negative impact on AAR’s forthcoming performance.

On top of it, the company’s government-related business could continue to suffer if sequestration is enforced for an extended period.

Other Stocks to Consider

AAR Corp. currently has a Zacks Rank #4 (Sell). However, other aviation companies like Elbit Systems Ltd. , B/E Aerospace Inc. (BEAV - Snapshot Report) and Esterline Technologies Corp. (ESL - Snapshot Report) are worth looking into now. While Elbit Systems sports a Zacks Rank #1 (Strong Buy), B/E Aerospace and Esterline carry a Zacks Rank #2 (Buy).

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