We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where AAR Corp. (NYSE:AIR) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician inspecting a commercial jet engine in a specialized testing facility.
AAR Corp. (NYSE:AIR)
Average Price Target Upside as of August 15: 38.41%
Forward P/E as of August 15: 14
AAR Corp. (NYSE:AIR) is a key player in the aviation and defense sector. It provides essential services that keep the aircraft flying and operational. The company operates through various segments namely, Parts Supply, Repair $ Engineering, Integrated Solutions, and Expeditionary Services. AAR Corp. (NYSE:AIR) operates internationally and serves commercial airlines, government entities, and military agencies.
The strategic edge of the company lies in its position in the industry, as the services and parts provided by AAR Corp. (NYSE:AIR) are necessary for both commercial customers and government agencies. This translates to high demand for the company’s products and its ability to generate revenues. Over the past 3 years AAR Corp. (NYSE:AIR) has been able to grow its revenue by 12% and its net income by 9%.
The company posted robust growth in the fourth quarter of 2024. AAR Corp. (NYSE:AIR) revenue grew 19% to $657 million driven by additional government contract volumes, market share gains, and increased demand from consumers. The company also improved its operating margins from 7.3% last year to 8.3% in fiscal 2024, making it a record year for the company.
During fiscal 2024, full-year sales improved 17% reaching $2.3 billion and its adjusted earnings per share gained 16% benefiting from structural tailwinds and growth in air travel. Management now eyes 2025 for future growth and expects revenue growth between 15% to 19% and operating margins at 9%.
What sets the company apart from its competition is its growing market share. Management indicated its plans to expand its distribution in the APAC region and Japan and also plans to explore the Asian market.
AIR is undervalued at current levels. It is trading at 14 times its forward earnings while the market average sits at 22. Moreover, its earnings are also expected to grow by 14% during the year to reach $0.92. 5 analysts have a strong buy rating on the stock, with their 12-month median price target of $85 presenting an upside of 38.41% from current levels.
Mairs & Power Small Cap Fund made the following comment about AAR Corp. (NYSE:AIR) in its Q3 2023 investor letter:
“Relative outperformance in the period came from AAR Corp. (NYSE:AIR). AAR Corp. (AIR), a supplier of parts and maintenance/repair services to the airline industry, is benefiting from a rebound in air miles traveled, and driving margins higher for the company.”
Overall AIR ranks 1st on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of AIR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AIR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
