Investors lifted shares of AAR (NYSE:AIR) by more than 3% Thursday after the company released its Q2 results for fiscal 2006. Judging from the earnings report, the small cap -- which manufactures products that support the aerospace and defense industries -- appears to be firing on all cylinders.

Three of the Illinois company's four main divisions posted substantial revenue upswings compared with the year-ago period. And the one apparent laggard in the bunch -- AAR's aircraft sales and leasing unit -- owed its decline to bookkeeping rules related to the way certain kinds of joint-venture revenues are treated. Indeed, while that division reported less revenue, its operating income actually rose compared with the year-ago period.

All told, income from continuing operations during Q2 rose to $7.9 million, which nets out to $0.22 per diluted share and represents a 47% increase over this time last year. This year's second quarter looks even better when you consider that the prior year's results were padded by a tax benefit that increased the company's earnings by a nickel a share.

All that said -- and while AAR's latest announcement indicates that the company is on track to deliver a solid 2006 -- it's worth pondering just how much higher this stock can fly. It's up more than 72% year to date, after all, and the company plays in a peer group that includes major-league big boys like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD), and Northrop Grumman (NYSE:NOC).

What's more, AAR ain't exactly a stable cash cow. Free cash flow -- i.e., cash from operations less capital expenditures -- has been erratic, and for the trailing 12 months that ended with August, its FCF figure was just $9.6 million. Couple this with a recent rise in inventory levels, and investors should be on guard.

With those particular metrics in mind -- and given that AAR's stock price is hovering near its 52-week high -- Fools of a feather may want to flock to the aerospace industry's lower-flying fare.

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Shannon Zimmerman is the lead analyst for the Motley Fool Champion Funds newsletter service and doesn't own any of the company's mentioned. The Fool has a strict disclosure policy .