Maybe you're like me -- you believe that commercial air travel is a fine market in principle, but sorting out the Continentals (NYSE:CAL) and Alaska Airs (NYSE:ALK) from the Uniteds and Deltas gives you a queasy feeling. But what about an outsourcing play that could theoretically serve the industry as a whole without being so tied to a single airliner? That's where AAR (NYSE:AIR) comes into the picture for me.
When I first reviewed it back in late March, I liked the idea of the company but was put off by the price tag. Now the stock is about 20% cheaper, and we have another quarter of earnings in the kitty.
Fourth-quarter earnings released last week saw revenue rise another 21%, and margins continue to expand -- the gross margin rose by more than three full points, and operating income more than doubled from the year-ago quarter. Now, I would have liked to have seen better commercial-versus-defense growth (defense was up 25%, commercial up 21%), but let's not pretend that 21% growth is a terrible result.
While defense is a good profitable base from which to grow, I want to see more in the way of commercial maintenance outsourcing. Right now, AAR can help you get parts and can service your airframe and landing gear, but that's about it. That's been enough to recruit customers like Mesa Air (NASDAQ:MESA), but perhaps there's a longer-term opportunity in taking on more and more maintenance functions. After all, maintenance is not a profit center for airlines, and we've seen service outsourcing make a lot of sense in many other industries that have high ongoing maintenance requirements.
There's a whole host of what I call "ride-along" plays out there. World Fuel (NYSE:INT) exposes you to global shipping and aviation, and tiny Todd Shipyards (NYSE:TOD) is a play on military and commercial ship repair. And you can even go to more tenuous extremes and point to companies like Accenture (NYSE:ACN) as "proof" that outsourced services can really underpin a real business.
Couple the drop in the stock price and the ongoing growth of the business, and these shares actually do look a little cheap to me. Not cheap enough to get really aggressive about buying, but perhaps enough to move to the active watch list. Though I might fairly be accused of not appreciating AAR enough for what it is and what it does today, I still can't help but see a better future for its business.
For more Foolish flights of fancy:
- Can U.S. Airways Make This Last?
- Up in the Air About AAR
- The Decline of Southwest and the Rise of JetBlue
Accenture is a Motley Fool Inside Value pick. Take the newsletter for a 30-day free spin.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
