AAR Corp. (AIR) Progresses In MRO Business: Should You Hold?

Higher business activities leading to a rise in air traffic have been accelerating maintenance spending on aircraft, which is driving MRO services growth cycle and in turn boosting AAR Corp.’s (NYSE:AIR) business.This has helped the company to remain the largest independent maintenance, repair and overhaul (MRO) provider in North America.

To expand its MRO business, the company has signed two contracts for heavy maintenance services with Air Canada in the fiscal second quarter. Moreover, the company won a long-term MRO deal from Republic airline to perform heavy maintenance on the latter’s fleet of 188 Embraer 170 and 175 aircraft.

With its principal customers being The Boeing Company (NYSE:BA) and Airbus Group (OTC:EADSY) , AAR Corp. expects to see strong improvement in its Aviation Services segment as demand for comprehensive supply chain and maintenance programs rises in domestic and overseas markets.

Coming to its earnings performance, AAR Corp. delivered a positive earnings surprise in one of the last four quarters, with an average miss of 0.77%. Notably, the company’s Zacks Consensus Estimate for fiscal 2018 earnings per share is $1.79, reflecting an annual improvement of 272.1%.

On the flip side, the U.S. government’s reduced role in Afghanistan as a result of the troop drawdown has had a significant impact on the company’s expeditionary airlift fleet operations in the country. The U.S. government had announced plans to reduce the number of troops in Afghanistan. Presently, the number of troops in the country is below 10,000.

The company’s expeditionary airlift service revenues will likely be hurt further if more troop reduction occurs in Afghanistan. Challenges posed by the airlift business are thus persistent headwinds for the company.

Moreover, a comparative analysis of AAR Corp’s P/E ratio reflects a relatively gloomy picture that might be a cause for investor concern. Evidently, the stock has a trailing 12 month P/E ratio of 26.45, which remains above the broader industry’s P/E ratio of 23.71 over a year, making it a dearer stock.

These may have led to AAR Corp.’s underperformance with respect to its broader industry. The company’s shares have returned 21.3% compared with the industry’s rally of 28.5%.

Zacks Rank & Key Pick

AAR Corp. has a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Rockwell Collins, Inc. (NYSE:COL) , which has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Rockwell Collins has an average positive earnings surprise of 2.61% for the past four quarters. The company boasts a solid long-term earnings growth rate of 11.6%.

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