We maintain our Outperform recommendation on AAR Corp. (AIR) based on Aviation Worldwide Services (AWS) acquisition, which pushed the second quarter 2011 EPS to 42 cents, beating the Zacks Consensus Estimate of 36 cents.  AWS is expected to beaccretive to earnings and margins and anticipated to have a positive impact on the company’s fleet expansion too.

Aviation Worldwide Services, a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments, was acquired from Xe Services LLC for $200 million.

Earnings Report Review

AAR Corp. posted upbeat results for the second quarter of fiscal 2011 based on the huge leap in revenue from the Government and Defense Services attributable to the acquisition of AWS in April 2010.

During the quarter, net income was $18.2 million or 42 cents per share, up 26.3% from the net income of $14.6 million or 34 cents per share in the corresponding period of fiscal 2010. Reported EPS beat the Zacks Consensus Estimate of $0.36.

Revenues were $447.1 million, a 36.0% increase from $328.7 million in the second quarter of fiscal 2010 based on a 46.0% increase in revenue generated from the Government and Defense Services segment compared with the year-ago level. Total revenue was way above the Zacks Consensus Estimate of $411 million.

(Read our full coverage on this earnings report: AAR Corp. Posts Upbeat Results)

Our Take

We are optimistic on AWS acquisition, which is expected to generate $175 million of revenue on an annual basis. In the long term, the acquisition is also likely to expand its products, services and capabilities to the government of the United States and abroad from where the company generates majority of its revenue. The synergy benefits are yet to be priced and hence we expect a significant upside in the stock price in the future.

The aviation industry is constantly undergoing development and change, and it is likely that new products, equipment and methods of repair and overhaul services will be introduced in the future. The industry on a whole has also started showing improvements and according to The Air Transport Association (IATA), the airline industry is expected to make a profit of approximately $9.0 billion in fiscal 2011, which is a positive indication to the stock. Hence, the stock currently retains its Strong Buy recommendation (Zacks #1 Rank).

 
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