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Why Shares of AAR Are Soaring Today

By Lou Whiteman – Sep 25, 2020 at 1:23PM

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An increase in defense business helped minimize a COVID-19-related commercial aerospace revenue decline.

What happened

Shares of AAR (AIR 2.78%) were up 10% on Friday after the aerospace maintenance and parts provider reported better-than-expected quarterly results. The COVID-19 pandemic is taking its toll, but the company's overall business is holding up much better than Wall Street had feared.

So what

On Thursday after markets closed AAR reported fiscal first-quarter earnings of $0.17 per share on revenue of $400.8 million, beating consensus expectations for a $0.05 per share loss on sales of $382 million.

The pandemic has crimped commercial aerospace sales because with airlines flying fewer planes, demand for spare parts and maintenance services has fallen. Overall AAR sales fell 26% in the quarter year over year, with commercial revenue down 48%.

A plane receiving maintenance work in a hanger.

Image source: Getty Images.

But AAR generated more than half of its business in the quarter from government and defense customers, compared to 38% of total revenue last year, helping the company to outperform expectations.

New business wins during the quarter include a three-year contract with the Royal Netherlands Air Force to repair F-16 jet fuel starters, as well as deals with Frontier Airlines and helicopter operator Air Methods to provide warranty and engineering services.

Now what

AAR has also pushed to cut costs through the downturn, including divesting its airlift and composites operations and consolidating its facilities footprint. Though its gross profit margin did fall 300 basis points year over year to 12.1% due to the lower commercial volumes, CEO John M. Holmes on a post-earnings call with investors said he believes AAR is well positioned to thrive once the pandemic is over.

"While the timing of the recovery is unknown, we believe that the actions we have taken and are continuing to take to adjust our cost structure and reposition our portfolio, combined with the strength of our team, the airlines' need for lower cost solutions, and our balance sheet, uniquely position us to benefit from an eventual return of demand and to emerge an even stronger and more profitable company," Holmes said.

Investors went into earnings expecting the worst, with AAR shares down more than 50% year to date. As Holmes said, the timing of an aerospace recovery is uncertain, but AAR, if nothing else, made its case that the company will be a survivor through the downturn.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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