With AAR Corp (AIR, Financial) experiencing a notable daily loss of -10.2%, yet holding a 3-month gain of 5.81%, investors are presented with a complex picture of the company's performance. The Earnings Per Share (EPS) standing at 1.9 further complicates the valuation landscape. This article delves into the question: Is AAR (AIR) modestly overvalued? By examining the company's valuation in detail, we aim to provide clarity on this pressing investment query.
Company Introduction
AAR Corp (AIR, Financial), a prominent player in the aviation, government, and defense markets, operates through two main segments: Aviation Services and Expeditionary Services. The former provides aftermarket support and maintenance for commercial and government/defense aircraft, while the latter caters to the U.S. Department of Defense and other organizations with equipment and personnel movement services. With a current stock price of $63.57 and a Fair Value (GF Value) estimated at $55.35, AAR (AIR) appears to be modestly overvalued. This valuation analysis will explore the financial intricacies that contribute to the company's market position.
Summarize GF Value
The GF Value is a proprietary metric that estimates the intrinsic value of a stock, considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance projections. If a stock's price significantly exceeds the GF Value Line, it's considered overvalued, suggesting a potentially lower future return. Conversely, a price below the GF Value Line indicates a stock that may offer higher future returns. At its current price, AAR (AIR, Financial) holds a market cap of $2.30 billion and is viewed as modestly overvalued, signaling that long-term returns may not align with the company's business growth.
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Financial Strength
Assessing a company's financial strength is crucial to avoid the high risk of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage provide insights into this area. AAR's cash-to-debt ratio of 0.19 ranks below 70.9% of its industry peers. However, with an overall financial strength rating of 7 out of 10, AAR's financial health is deemed fair.
Profitability and Growth
Companies with consistent profitability over the long term, like AAR, which has been profitable for 10 out of the past 10 years, tend to carry less investment risk. AAR's recent annual revenues reached $2.10 billion with an Earnings Per Share (EPS) of $1.9. Despite an operating margin that falls behind 51.01% of its industry counterparts, AAR's profitability is ranked as fair by GuruFocus.
Growth is a pivotal factor in a company's valuation, with GuruFocus research indicating a strong correlation between growth and long-term stock performance. AAR's 3-year average annual revenue growth rate is -1.4%, trailing 62.26% of the industry, while its 3-year average EBITDA growth rate of 24.5% surpasses 81.12% of its peers, highlighting its strong growth prospects.
ROIC vs WACC
Comparing Return on Invested Capital (ROIC) to Weighted Average Cost of Capital (WACC) provides another perspective on profitability. Ideally, ROIC should exceed WACC to indicate efficient cash flow generation relative to capital investment. AAR's ROIC over the past 12 months is 7.81, which is unfortunately lower than its WACC of 10.77, suggesting challenges in generating sufficient returns on investments.
Conclusion
In summary, AAR (AIR, Financial) appears to be modestly overvalued based on the current market assessment. The company demonstrates fair financial conditions and profitability, with growth rates that are commendable within the Aerospace & Defense industry. For a deeper understanding of AAR's financial journey, interested parties can examine its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
