Prior to its earnings release, AAR Corp. (AIR) provided guidance for the fourth quarter of fiscal 2010. Management is anticipating a marginal recovery in the global market, which is expected to have a positive effect on the airline industry as well.
The company now expects EPS in the range of 25 to 30 cents, compared to 26 cents in the previous quarter. There might be a slight improvement since the last quarter based on the global recovery but if compared to the year-ago quarter then there will be a huge fall from 51 cents reported in the quarter. The reason for the decrease will be reduced demand and lower air fares together with weak demand for parts support.
However, revenues are expected within the range of $355-$365 million, up from $310 million in the previous quarter. The growth in revenues is expected to stem from the acquisition of Aviation Worldwide Services, a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments.
Management expects the acquired business to be accretive to earnings and margins in its first year of ownership and to generate $175 million of revenue on an annual basis.
Through this acquisition 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 a majority of its revenue from sales to government and defense customers. In the third quarter of fiscal 2010, AAR generated approximately 50% of its total revenues from this segment.
Revenue expectations are below $370 million reported in the year-ago quarter based on poor market conditions.
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 will help the company get numerous 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.
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