On Jul 3, 2015, we have updated our research report on AAR Corp. AIR, a provider of aftermarket products and services to the global aerospace/aviation industry.
AAR is a global leader in maintenance, repair and overhaul (MRO) and supply chain services. The company continues to deliver value to its customers by means of improved services and technologically advanced products.
On account of its strong foothold in the global aviation services market, the company expects its MRO business to grow given rising demand in the commercial sphere, thereby boosting its top line going forward. During the first nine months of fiscal 2015, sales to commercial customers increased 6% year over year mainly attributable to higher supply chain volumes.
The company continues to provide sustained and improved services to its customers. It has earned a reputation for enhancing operational efficiency in the projects it has undertaken. Owing to these skills, the company was selected by Advanced Military Maintenance Repair and Overhaul Center (AMMROC) in Nov 2014 to support the design of its new MRO facility in UAE.
Apart from enhancing customer value, AAR is focused on improving its position and driving growth. Recently, the company has entered into a joint venture (“JV”) with South African Airways Technical (“SAAT”), the maintenance unit of South African Airways, in order to reduce costs and enhance the fleet’s operational efficiencies. A memorandum of understanding was signed between the parties for this JV at the 51st International Paris Air Show.
In 2014, AAR Corp. acquired assets of Cool Containers, a manufacturer of temperature-controlled containers used to transport climate-sensitive pharmaceuticals and biological cargo. This acquisition will expand AAR Mobility's global position.
Moreover, the company intends to shift its MRO facility in Hot Springs, AR to its Oklahoma City facility. The move is part of its efforts to optimize its assets and improve return on invested capital. Owing to overcapacity in North America, the company plans to transfer its maintenance operation for regional aircraft to Oklahoma City by Aug 2015. This would better align the capacity of AAR's 1MRO Network with current market demand.
Given the tepid defense budget picture in the U.S., contract flows from the Pentagon will certainly hurt the company’s top-line performance. Sales to government and defense customers decreased 25.4% year over year in the first nine months of fiscal 2015 due to lower demand from the Defense Department for expeditionary airlift services in Afghanistan.
Pentagon’s reduced role in Afghanistan as a result of the troop drawdown has had a significant impact on the company’s expeditionary airlift fleet operations. Moreover, the products are sold at fixed unit prices. Therefore, any increase in the cost of labor and materials would result in cost overruns and losses on contracts.
AAR currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include TransDigm Group Inc. TDG, sporting a Zacks Rank #1 (Strong Buy) and Raytheon Co. RTN and Spirit AeroSystems Holdings, Inc. SPR, each carrying a Zacks Rank #2 (Buy).
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