On Thursday, KeyBanc Capital Markets initiated coverage on AAR Corporation (NYSE:AIR) shares, assigning an Overweight rating and setting a price target of $83.00. The firm's analyst pointed to the aviation and defense (A&D) industry's multiyear up-cycle as a positive environment for AAR, particularly in the aftermarket sector. AAR Corporation is expected to benefit as older aircraft are brought back into service, increasing the demand for aftermarket parts.
AAR's current situation is seen as advantageous, despite potential limitations in the supply of used serviceable materials (USM) caused by slower original equipment manufacturer (OEM) production and postponed fleet retirements. The analyst believes that the overall benefits outweigh these challenges.
AAR's facilities are reportedly operating at full capacity, and the company could see growth from capacity expansions, efficiency improvements, new product introductions, and cross-selling opportunities. InvestingPro data reveals impressive revenue growth of 18.5% in the last twelve months, with a healthy current ratio of 2.68x indicating strong operational efficiency.
Recent mergers and acquisitions have provided AAR with new avenues for growth and the ability to scale operations more rapidly. Although AAR's leverage ratio is approximately three times, which is high compared to its historical averages, mainly due to its acquisition of Triumph Group (NYSE:TGI), KeyBanc anticipates that AAR's free cash flow (FCF) generation over the next 12 to 18 months will be sufficient to bring leverage back to normal levels.
The company maintains an Altman Z-Score of 3.53, indicating financial stability despite the increased leverage. For deeper insights into AAR's financial health and growth prospects, investors can access comprehensive analysis through InvestingPro's detailed research reports.
AAR Corporation's stock is currently trading in the middle of its historical range. However, KeyBanc argues that the upper end of this range is more fitting, given the favorable macroeconomic conditions anticipated to persist.
The price target of $83.00 is based on an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of approximately 10.5 times the firm's fiscal year 2026 estimates, compared to AAR's historical EV/EBITDA range of 8 to 11 times. Based on InvestingPro's Fair Value analysis, the stock appears to be trading near its fair value, with analysts maintaining a strong buy consensus rating of 1.2 out of 5.
In other recent news, AAR Corp (NYSE:AIR) announced the departure of Senior Vice President and Chief Human Resources Officer, Tracey Patterson, who will be leaving the company to pursue a new professional opportunity outside of the aviation industry. The company has not yet announced a successor for Ms. Patterson but has assured that the transition will be managed to ensure continuity in the Human Resources department.
In financial developments, AAR Corp reported strong fiscal second quarter results, surpassing analyst expectations. The company posted adjusted earnings per share of $0.90, exceeding the analyst consensus of $0.88. Revenue for the quarter rose by 26% year-over-year, reaching $686.1 million, considerably higher than estimates of $654.18 million.
Furthermore, AAR Corp experienced notable organic growth of 12% in the quarter, a significant increase from 6% in Q1. The Parts Supply segment saw sales growth of 20%, while Repair & Engineering revenue surged by 57% compared to the previous year. The company's adjusted EBITDA margin expanded to 11.4% from 10.1% in the prior year quarter.
CEO John M. Holmes anticipates "continued strong sales growth in the second half of fiscal year 2025" and further margin improvements. The company remains on track to reduce leverage following its recent Product Support acquisition.
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