AAR Soars 10%, Beats 1Q Estimates Despite Covid’s Impact

AAR (AIR) stock jumped 9.7% following better-than-anticipated results for the first quarter of fiscal 2021 (ended Aug. 31) even as the COVID-19 pandemic dragged down the sales of the aerospace and defense solutions company.

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First-quarter adjusted EPS plunged 70% Y/Y to $0.17 due to lower sales and weak margins. Analysts were expecting a loss per share of $0.05. AAR’s adjusted earnings exclude the impact of $8 million of the CARES Act grant utilized by the company and $3 million of other non-US government labor subsidies.

AAR’s first-quarter sales declined 26% Y/Y to $400.8 million but came ahead of analysts’ estimate of $382 million. The top-line was impacted by a 29% decline in sales of the Aviation Services segment to $364 million, partially offset by a 25.3% rise in sales of the Expeditionary Services segment to $37.2 million.

Overall, consolidated sales to commercial customers fell 48% reflecting the continued impact of Covid-19 and the slow recovery in commercial passenger air traffic. However, consolidated sales to government customers rose 9.8% driven by execution on recent government contract awards including the US Air Force pallet contract in the company’s mobility business.

Looking ahead, AAR’s management expects its government business to be stable for the year. Within the commercial business, management anticipates aftermarket business to recover before the OEM (original equipment manufacturer) business.

In reaction to the 1Q results, Credit Suisse analyst Robert Spingarn raised his price target for AAR to $27 from $26 and reiterated his Buy rating. In a research note to investors, the analyst stated “Although AAR will continue to face headwinds in the near and medium term, especially in its commercial businesses, we believe AAR is well positioned to outperform as commercial aviation recovers.”

He added, “With cash flow stability provided by its defense/gov’t exposure (56% of FQ1 sales) and a strong balance sheet (1.1x Net Debt/EBITDA), AAR is poised to benefit from airlines seeking cost savings solutions and increased adoption of USM.” (See AIR stock analysis on TipRanks)

The Street is cautiously optimistic on AAR with a Moderate Buy consensus based on 2 recent Buys, 2 Holds and no Sell ratings. AAR stock has plummeted about 57% year-to-date. However, the stock could rise 21% in the coming months as indicated by the average analyst price target of $23.75.