AAR Corp. – Supply Chain Optimization for Operational Efficiency

AAR Corp.’s ( NYSE AIR ), share price has recently risen significantly due to its strong earnings. AAR Corp. is a good buy at the moment due to its solid future performance, strong balance sheet, slight overvaluation and supply chain optimization that fosters growth in long-term.

Business Overview

AAR Corp. provides a wide range of products and services to the international markets for commercial aviation, government and defense. Aviation Services, a division of the business, specializes in engineering, distribution, inventory, aftermarket support and MRO. AAR Corp. provides supply chain logistic programs, inventory and repairs programs, warranty claim management, and leasing of engine and airframe components. Their services are used by the U.S. Department of Defense and other governments. They also offer engineering, line maintenance and refurbishing services, inspections and repairs for airframes as well as overhauls and repairs for parts such as landing gears and wheels.

AAR Corp.’s Expeditionary Services division is responsible for the transportation needs of both domestic and foreign governments, as well non-governmental organizations. This market segment offers engineering and system integration for command and controls systems, as well as specializing on the design, manufacture and maintenance of transport pallets, containers and shelters.

AAR Corp. offers services to many clients including domestic and foreign passenger airlines, cargo carriers, regional and commuter airline operators, OEMs, aircraft leasing companies, aviation aftermarket support firms and domestic and overseas military clients. The corporation markets and sells primarily its products and services through its employees and overseas sales representatives.

Financials

AAR Corp.’s financial strength is demonstrated by its market capitalization, which stands at $1.97 billion, and a return on capital that has been steadily rising. The stock is currently trading at $57.76 and close to its 52 week high of $58.36. AAR may have a P/E ratio of 23,03, but the company has outperformed its peers on various metrics.

AAR doesn’t pay a dividend but it can capitalize on its core business expansion to keep up with the competition, and increase shareholder value by increasing the stock price. This is done without dilution of shareholders during times of declining profitability.

Earnings

AAR Corp.’s share price has experienced an unprecedented surge, thanks to its Q3 earnings. The company’s resilience has been demonstrated despite challenging macroeconomic conditions marked by high rates and price volatility. AAR exceeded earnings expectations by $0.05 per share and reported an impressive $0.75. Revenues also exceeded projections by $33.59 millions, reaching $521,000,000, a 15.2% increase year-over-year. AAR has achieved exceptional results and generated a cash flow from operations of $17 millions. This demonstrates AAR’s ability for outperformance.

AAR’s positive estimates of earnings, which are driven by growth in sales and margin expansions, demonstrate the advantages of cultivating patience and long-term strategies for sustainable success.

Outperforming the Broader market

AAR’s performance over the last three years has been exceptional, outperforming the S&P 500 Index. This success is attributed to AAR’s recovery in margins, and the rebounding travel industry after the pandemic.

Analyst Consensus

Analysts have rated AAR as a strong-buy in the past three months. The recent rise in the share price, driven by strong earnings seems conservative when compared to the new growth prospects of the company.

Balance Sheet

AAR has a strong balance sheet, which is characterized by a decreasing level of debt in spite of high interest rates. The company also boasts a strong interest coverage ratio (18x), demonstrating its ability to handle macroeconomic challenges while utilizing its assets during expansionary times. AAR’s current ratio is 3.22, and its Altman Z score is 4.51. This puts it in a good position to remain relevant for many years.

Valuation

For a complete analysis, I needed to calculate the Capital Asset Price Model’s Weighted average Cost of Capital and AAR’s Cost of equity. My calculations show that AAR’s cost of equity is 8.47%. I used a risk-free interest rate of 3.84%, based on the 10-year Treasury yield. This is the return investors expect to receive in order to offset the risk of holding AAR’s stock.

By using the figures above, I calculated that AAR’s WACC is 7.84%. This is lower than the average industry of 10.59%.

AAR has been undervalued approximately 3% after a thorough analysis using a DCF Equity Model. This evaluation includes a fair-value estimate of $59.8. The valuation was done using an 8.47% discount rate over a five-year period. The analysis also assumes that revenue and margins will continue to grow, due to increased operational efficiency, which in turn leads cash flow to be used for expansion and compound growth.

Supply Chain Optimization: Creating Operational Efficiency

AAR Corp uses predictive analytics to improve the operational efficiency of its maintenance, repairs, and overhauls. AAR Corp is able to predict and optimize maintenance plans, identify probable equipment breakdowns and plan maintenance tasks proactively by using advanced data analytics algorithms.

AAR Corp, for example, gathers and analyzes real-time information from aircraft sensors, maintenance logs and other relevant sources to identify patterns and trends. They are then better able to predict maintenance needs and plan maintenance to maximize efficiency and minimize downtime.

AAR Corp will see substantial financial gains over the long-term by implementing this strategy. AAR Corp’s maintenance schedules can help reduce unplanned incidents of maintenance and their associated costs. By taking preventive steps, they can avoid equipment failures and reduce the risk of costly repairs. AAR Corp. can also increase the number of flights for its clients and generate more revenue by increasing aircraft availability. This will improve client satisfaction and boost profits. AAR can use this improved financial performance to scale up its core business and weather economic challenges.

AAR Corp can also improve its inventory management by using predictive analytics in MRO operations. By accurately forecasting parts and maintenance requirements, they can reduce excess inventory and avoid stockouts. Carrying costs, waste, and overall supply chain efficiency are all improved. AAR will be able to better compete with rivals and increase customer satisfaction by having more cash and incurring lower inventory costs and fixed costs.

Risks

Competition in the Industry: The Aviation Sector is highly competitive with many firms offering similar services. Established businesses as well as up-and coming competitors can have an impact on AAR’s market share, pricing, and profitability.

Regulatory environment: Regulating Authorities enforce strict rules and safety requirements within the aviation industry. AAR could face increased operating costs and difficulties as a result from complying with these standards, and any revisions or modifications.

Technological Progress: Technologies that are advancing rapidly, such as digitalization and automation in aviation, have the potential to disrupt established business structures. AAR needs to invest in R&D and keep pace with the latest technologies in order to remain competitive.

The conclusion of the article is:

In summary, I think that AAR’s stock is currently a good buy because of its solid future performance, strong balance sheet, slight overvaluation and supply chain optimization, which fosters growth on the long-term.