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AAR's Outperform Rating Reaffirmed

BA AIR LMT

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We recently maintained our Outperform recommendation on AAR Corp. (AIR - Analyst Report), one of the leading suppliers of aftermarket products and services to the global aerospace/aviation industry. Headquartered in Delaware, the company conducts its business mainly through 7 subsidiaries.

A strong aviation market in the fiscal 2013 is expected to augment the commercial air transport sector, helping the company to prosper. Besides, the strategic contract wins coupled with a strong operating efficiency of the company is indeed a blessing.

A reduction in the leased aircraft portfolio in order to remain focused on the core business also exhibits strong possibilities for the company to become a specialist in the industry it operates.

However, we are conscious of the overcapacity in the commercial aviation market, adjustment in the military spending along with a margin pressure on the company.

The company’s results in the fiscal second quarter 2013 showed signs of growth due to market share gains in the aviation sector along with the disposal of non-core assets of the company. The company had a strong balance sheet, exiting the quarter. 

The 6.4% increase in total revenue was overshadowed by a 5.5% increase in the cost of sales; earnings per share came in at 44 cents per share. The company's operating margin increased to 7.4% in the reported quarter from 7.1% in the year-ago comparable quarter.

A positive earnings surprise of roughly 7% in the trailing two quarters, along with an increase in the earnings guidance by management, reinforces our belief that the company will continue to outperform the market in the future.  

The current Zacks Consensus Estimate for the third quarter is 42 cents, growth of roughly 1.8% year over year. Estimates for 2013 and 2014 are $1.79 and $2.06, respectively. These represent annual increase of 4.4% in 2013 and 15.1% in 2014.

Currently, AIR has a Zacks #3 Rank, which translates into a short-term (1-3 months) Hold rating. The company’s prime competitors Boeing Co (BA - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report) have a Zacks #3 Rank (Hold).

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