Canaccord: AAR To Benefit From Positive Inflections In Earnings, Free Cash Flow

Sentiment on AAR Corp. AIR stock could take a turn for the better, as the focus and execution on key 2019 priorities is better appreciated by investors, an analyst at Canaccord Genuity said.

The Analyst

Canaccord Genuity analyst Ken Herbert upgraded AAR from Hold to Buy and increased his price target from $42 to $48.

The Thesis

Continued strength in the commercial aerospace aftermarket, accounting for 65 percent of sales, along with positive inflections in earnings and FCF will benefit AAR, Herbert said in a note.

Despite expecting additional noise with the 2H18 results, the analyst said the path to about $2.65 in earnings per share for fiscal year 2019 is increasingly doable. Moreover, the outlook for positive FCF in 2019 isn't reflected in the stock.

Although the company is investing to support its commercial Integrated Solutions business, working capital is likely to grow materially, as these investments slow, Canaccord said. The firm also sees other tailwinds from lower cash taxes and improved earnings, supporting FCF in 2019.

"As the leading, independent provider of commercial AM services, AAR is well positioned to benefit from continued airline outsourcing, cost control and fleet growth," Herbert said.

Herbert expects the new management to bring in fresh perspective and focus to growth opportunities, and the balance sheet strength to provide capital deployment optionality.

As the company executes on these opportunities, the traditional valuation discount of AAR shares should narrow, the firm said. Once the stock starts to trade closer to a peer multiple, the firm sees significant upside.

The Price Action

AAR shares were up about 14 percent over the past year. The stock closed up 2.42 percent at $38.54.