AAR Corp (AIR) Suffers Labor Shortage, Soft Airlift Business

We recently issued an updated research report on AAR Corp. (NYSE:AIR) . In second-quarter fiscal 2019, the company’s adjusted earnings came in at 59 cents per share, which surpassed the Zacks Consensus Estimate by 3.5%.

Backed by continued growth in its trading, distribution and programs activities, AAR Corp witnessed year-over-year improvement in sales.

Factors Influencing the Stock

AAR Corp operates in a space that is highly competitive, and consists of both big and small industry players. To keep up with other players in this space, the company will have to spend substantially toward technological progress, which might adversely impact its operations and financial condition.

Lately, the company is witnessing labor shortages in its MRO business for quite some time. With no near-term rebound expected in this shortage issue, the company has reduced its fiscal 2019 revenue guidance from the range of $2.1–$2.2 billion to $2.0–$2.1 billion.

To this end, Oliver Wyman, a leading global management consulting firm, predicted in April 2018 that technician supply will be challenging over the next five years for the MRO aviation space. This, in turn, may result in increased labor costs. Therefore, the growth prospects of AAR Corp’s MRO business seem to be bleak.

Meanwhile, the U.S. Department of Justice (DoJ) is conducting an investigation of AAR Corp.’s airlift business segment under the federal civil False Claims Act (FCA). Also, 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.

Considering the recent developments, the company has lately decided to sell off its airlift assets by the end of fiscal 2019, probably realizing that this unit may not continue to be profitable.

Further analysts do not seem to be very optimistic about the company’s operational performance in the upcoming quarters. Evidently, the Zacks Consensus Estimate for AAR Corp.’s fiscal 2019 earnings has moved 4.8% south to $2.57 over the last 60 days.

However, the company’s Aviation Services segment continues to benefit significantly from its strong position in the growing global aviation market.

Zacks Rank & Stocks to Consider

AAR Corp currently has a Zacks Rank #4 (Sell).

A few better-ranked companies in the same sector include AeroVironment, Inc. (NASDAQ:AVAV) , Teledyne Technologies Incorporated (NYSE:TDY) and American Outdoor Brands Corporation (NASDAQ:AOBC) . While AeroVironment and Teledyne Technologies sport a Zacks Rank #1 (Strong Buy), American Outdoor Brands carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment delivered average positive earnings surprise of 257.01% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings has moved 8.8% north to $1.48 over the past 90 days.

Teledyne Technologies delivered average positive earnings surprise of 12.92% in the preceding four quarters. The Zacks Consensus Estimate for 2019 earnings has climbed 5.3% to $9 over the past 90 days.

American Outdoor Brands delivered average positive earnings surprise of 64.88% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings has been upwardly revised by 9% to 73 cents over the past 90 days.

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