Benchmark raises AAR Corp shares target, confidence in prospects

On Monday, AAR Corporation (NYSE:AIR), a provider of aviation services, saw its share price target increased by Benchmark from $65.00 to $83.00. The firm has sustained a 'Buy' rating on the stock, indicating continued confidence in the company's prospects. The upgrade comes on the heels of several key developments that are expected to influence AAR's financial performance positively.

The decision by Benchmark to raise the price target is based on AAR's strong position in the aerospace aftermarket, which is currently experiencing robust fundamentals. Additionally, the firm believes that the recent acquisition of Triumph Group (NYSE:TGI) has not been fully appreciated by the market. The acquisition is seen as a strategic move that will shift AAR into higher-margin operations and foster future growth.

Benchmark also anticipates that AAR will benefit from the divestiture of its lower-margin Expeditionary segment. This move is part of a broader strategy by AAR to adopt a more aggressive posture in the market.

According to Benchmark, AAR is trading at an attractive valuation of 7.6 times its May Fiscal Year 2025 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), which is at the lower end of its peer group in the aerospace aftermarket sector.

The analyst from Benchmark highlighted that the recent decline in AAR's stock price following the latest earnings report presents an interesting buying opportunity. The drop was attributed to the market's reaction to the timing of AAR's operating margin trajectory, which is expected to exceed 10%. The acquisition of Triumph, valued at over $700 million, is seen as a structural shift towards higher-margin operations, which will also provide leverage for AAR's future growth.

Furthermore, AAR's extensive maintenance, repair, and overhaul (MRO) shops and distribution networks are expected to enhance the opportunities brought about by the Triumph acquisition. The company is also likely to add additional higher-margin assets over time.

Benchmark noted that while the first half of the year includes investments in parts manufacturer approval (PMA) development, geographic optimization, and the integration of Triumph, the benefits of these investments are expected to materialize in the second half of the year. The analyst concluded that the recent movement in AAR's stock price is more reflective of the timing of margin profile changes rather than the fundamental operational shift that is still anticipated.

As AAR Corporation (NYSE:AIR) garners a positive outlook from Benchmark with an increased price target, InvestingPro data and tips offer additional insights into the company's current financial health and market position. With a market capitalization of $2.12 billion and a P/E ratio standing at 35.43, AAR is trading at a high earnings multiple, indicating investor confidence in its future earnings potential. The company's revenue growth over the last twelve months, as of Q3 2024, has been strong at 15.81%, reflecting the robust fundamentals of the aerospace aftermarket that Benchmark also cited. This is complemented by a gross profit margin of 19.1%, which may be seen as a testament to AAR's operational efficiency during this period.

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InvestingPro Tips highlight that analysts have revised their earnings expectations downwards for the upcoming period, suggesting that investors should keep an eye on future earnings reports. Additionally, while the stock price has shown volatility, AAR's liquid assets exceed its short-term obligations, providing the company with financial stability. This is further supported by a moderate level of debt that AAR operates with. For those considering an investment, analysts predict that AAR will maintain profitability this year, and the company has been profitable over the last twelve months.

For a more comprehensive analysis and additional InvestingPro Tips, investors can explore AAR's profile on InvestingPro. There are 8 more tips available to help you make an informed decision. Don't forget to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

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