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Taking Stock of AAR Corp’s Risk Factors Post Q4 Results

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AAR Corp. (AIR) is an independent provider of aviation services to commercial and government customers worldwide. The company reported a 5% year over-year-year jump in revenue and a robust 81% jump in earnings per share in Q4.

Let’s take a look at the company’s financial performance and what’s changed in its key risk factors that investors should be aware of.

The company’s Q4 revenue at $438 million was ahead of the consensus estimates of $421.7 million. Earnings per share of $0.47 also beat the Street’s estimates by $0.02.  

With a recovery in the commercial market from the impact of the COVID-19 pandemic, the increase in its top line was witnessed due to an uptick in sales to commercial customers as well as sales to government and defense customers.

The President and CEO of AAR Corp, John M. Holmes, said, “We are encouraged by the strong recovery in domestic leisure travel as well as the recent positive commentary from our airline customers regarding increasing levels of domestic business travel… Additionally, our government end markets have continued their strong performance and the pipeline of opportunities remains full.”

Meanwhile, a focus on cost reduction and increasing operating efficiency helped the company increase its adjusted operating margin to 5.2% versus 3.2% a year ago. (See AAR Corp stock chart on TipRanks)

Now, let’s look at what has changed in the company’s key risk factors.

According to the new Tipranks Risk Factors tool, AAR Corp’s two main risk categories are Finance & Corporate and Legal & Regulatory, which account for 33% and 19%, respectively, of the total 21 risks identified. Since May, the company has changed three key risk factors.

Under the Finance & Corporate risk category, the company highlights that at present it is prohibited from paying dividends under the Payroll Support Program under the CARES Act through September 30, 2021. In the future, it may not be able to pay dividends or choose not to pay dividends, depending on business conditions and capital needs. Any future failure to pay or maintain dividend payouts can negatively affect its stock price.

Under risk related to financial matters, the company acknowledges that it may need to reduce the carrying value of its assets. AAR Corp owns and distributes a large number of engines, aircraft parts, and components. It also has goodwill and other intangible assets associated with acquisitions. If the company fails to achieve projected levels of results or demand for its aircraft and engine replacement parts and repair services decreases, then AAR may have to recognize impairment charges to lower the carrying value of these assets.

The third key risk stems from the current COVID-19 pandemic, which has had an adverse impact on AAR’s business, results of operations, and liquidity. The duration and extent of COVID-19 could prolong or increase this negative impact.

With the easing of COVID-19 related restrictions, passenger air traffic has picked up in the U.S. but business travel still remains below pre-COVID levels. In certain markets, AAR has seen and expects to see lower demand in its non-cargo commercial businesses. A reduction in the fleet by airlines also means lower demand for AAR’s support and maintenance activities. While focusing on lowering costs, the company also received financial assistance of $57.2 million under the CARES Act.

The Finance & Corporate risk factor’s sector average is at 37%, compared to AAR Corp’s 33%.

Following AAR Corp’s Q4 performance, Canaccord Genuity analyst Kenneth Herbert reiterated a Buy on the stock with a price target of $48.

Herbert noted that AAR’s Q4 performance points to a steady recovery in the aerospace market and believes the company’s USM business holds major upside potential but the timing of recovery remains uncertain.

Meanwhile, Credit Suisse’s Robert Spingarn too maintained a Buy rating on the stock with a price target of $52.

Overall, the stock has a Moderate Buy consensus based on 2 Buys. The average AAR Corp price target of $50 implies 37.4% upside potential. Shares are up 89% over the past year.

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