AAR Corp.’s New Contract – Analyst Blog

AAR Corp. (AIR) has won a $24 million contract from the U.S. Army. According to the contract, the company will provide shelters for the Army. The company manufactures and designs special equipment and mobile tactical shelters for rapid deployment, which are generally used to mobilize, deploy and sustain forces.

 

A few days back, AAR Corp. received a $90 million contract from Bombardier Aerospace, Belfast, to design and manufacture composite flap track fairings for the wings of its new CSeries family of commercial aircraft.

 

Recently, the company decided to acquire Aviation Worldwide Services, a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments, from Xe Services LLC for $200 million. The acquisition is expected to close by April 2010.

 

New contracts and the acquired business are expected to be accretive to earnings and margins. The acquisition alone is expected to generate $175 million of revenue on an annual basis.

 

AAR is expected to expand its products, services and capabilities to government customers in the United States and abroad in the long term. The company generates the majority of its revenue through sales to government and defense customers.

 

In the third quarter of fiscal 2010, AAR generated approximately 50% of its total revenue from sales to government and defense customers. Also in the first quarter, AAR Global Solutions, a joint venture company, was formed, which will provide value-added solutions for the U.S. and friendly foreign governments’ defense and nation-building initiatives. This will also enhance revenue in AAR’s government and defense segment.

 

We believe that the company will perform well once the market recovers due to its industry leading supply chain and MRO positions. The company’s strict cost control initiative is another benefit. New products, equipment and methods, as well as acquisitions and joint venture will help the company gain contracts from the government.

 

However, the cyclical nature of the aviation industry is discouraging. Moreover, the company’s huge capital requirement is a drawback. Thus, we reiterate our Neutral recommendation.