GR Goodrich Corp. (The)

We maintain a Neutral recommendation on AAR Corp. (AIR).

The aviation industry as a whole has started showing signs of improvement. We expect such a scenario, to bring in a positive trend in the commercial air transport market, thereby creating robust demand for maintenance and spare parts, equipment and methods of repair and overhaul services.

Adding to its advantage, AAR Corp. has been winning a number of significant contracts for providing value-added solutions in support of the U.S. Army and Navy, as well as that of defense and nation building initiatives of other foreign governments. This looks impressive going forward.

However, the company is operating in a cyclical and competitive commercial aerospace market, at the risk of significant downturns. Therefore, an adverse situation of an overcapacity and cutthroat competition in the market may contract margins.

Moreover, being part of a highly capital intensive industry, the company needs to depend on the continuing availability of debt and equity capital. Under such circumstances, the risk of the company’s inability to obtain favorable financing terms would be harmful in the near future.

Risks boil down as we witness the sales growth in the second quarter of 2012. Growth was driven by strength at the company's supply chain business supported by demand surge among government and defense customers at the Defense Logistics business. Margin improvement was also witnessed due to better product availability at the Aviation Supply Chain segment along with operational efficiencies at the company's airframe maintenance centers.

Conversely, the company leases aircraft and engines to its customers on an operating lease basis, the terms of which are subject to new aircraft deliveries, availability of used aircraft and engines in the marketplace, competition, financial condition of the customers and fluctuating demand in the airline industry.

These uncontrollable factors may induce substantial risks for the company. Further, the company is exposed to currency fluctuation, lower defense spending and change in the levels of military flight operations.

Nonetheless, demand for air transport is anticipated to be stronger in the near future with rising business activities alongside a slight increase in defense spending across nations. The company’s market expertise, technical and financial capabilities are expected to provide it with a strong competitive advantage, thereby helping it to maintain a satisfactory position in the industry.

Wood Dale, Illinois based AAR Corp. provides various products and services to the aviation and defense industries worldwide. The company competes directly with its peers, such as Goodrich Corp (GR), Boeing Co (BA), Lockheed Martin Corporation (LMT). AIR has a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.

 
AAR CORP (AIR): Free Stock Analysis Report
 
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