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Can AAR Earnings Ride Boeing's Coattails Higher?

By Dan Caplinger - Sep 23, 2013 at 5:45PM

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The air-services company should benefit from the boom in aircraft sales at Boeing, but can AAR earnings climb in the near-term?

AAR (AIR -1.11%) will release its quarterly report on Tuesday, and investors have grown increasingly optimistic about the company's prospects, sending the stock to its highest level in a year recently. With the air-services company benefiting from the trends that have boosted the entire aerospace industry, AAR earnings have the opportunity to produce strong growth as long as the positive trends last.

AAR has two main businesses in working in the defense and commercial aerospace industry. Its air-services segment provides a variety of services, including aftermarket sales and leases of new, overhauled, and repaired parts and components; maintenance inspection and overhaul; and logistics and inventory-management systems. AAR also produces airdrop and transportation pallets as well as in-plane cargo loading and handling systems, counting both Airbus and Boeing (BA -2.60%) among the plane manufacturers it serves. Given the success of the commercial aircraft industry lately, can AAR cash in on its growth opportunity? Let's take an early look at what's been happening with AAR over the past quarter and what we're likely to see in its report.

Stats on AAR

Analyst EPS Estimate

$0.45

Change From Year-Ago EPS

0%

Revenue Estimate

$542.11 million

Change From Year-Ago Revenue

(1.5%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can AAR earnings keep improving this quarter?
Analysts have boosted their views on AAR earnings in recent months, adding $0.03 per share to their August-quarter estimates and about 2% to their full-year fiscal 2014 projections. The stock has also done well, soaring more than 35% since mid-June.

AAR had mixed results in its May-quarter report. The company posted a slight 1.7% drop in revenue, but its aviation-services segment managed a 7% revenue boost on the heels of its commercial supply-chain business. Government and defense customers saw sluggish sales, with the company having to take a charge in connection with its supply chain services business for Northrop Grumman (NOC 1.95%) and its fleet of KC-10 aircraft for the U.S. Air Force. As the Air Force has reduced active flight hours, AAR's revenue from the contract is likely to decrease. Guidance for fiscal 2014 was also relatively uninspiring, failing to pull shares up.

But those results haven't kept AAR from considering expansion. The company said last month that it would open a new facility in Louisiana to provide maintenance, repair, and overhaul services in Lake Charles. The facility will be the sixth in the U.S. and will solidify its status as a top-three provider of those services worldwide.

One big question facing AAR is the extent to which the United Technologies (RTX 0.21%) acquisition of Goodrich will affect the company. Goodrich lists AAR as a competitor in the cargo-systems business, along with a subsidiary of Heico (HEI -0.75%). With the power of United Tech behind it, Goodrich could make bigger pushes toward maximizing its profits from the segment, although Goodrich is such a large business that it arguably has more lucrative areas to focus on rather than going after AAR head-on.

In the AAR earnings report, watch to see how the company's breakdown of government and commercial business fares. In all likelihood, with Boeing seeing more aircraft sales, the commercial sector has the greater growth potential for AAR going forward.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Heico. The Motley Fool owns shares of Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AAR Corp. Stock Quote
AAR Corp.
AIR
$47.30 (-1.11%) $0.53
The Boeing Company Stock Quote
The Boeing Company
BA
$167.61 (-2.60%) $-4.47
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$95.25 (0.21%) $0.20
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$494.96 (1.95%) $9.46
HEICO Corporation Stock Quote
HEICO Corporation
HEI
$164.32 (-0.75%) $-1.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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