AAR High on Revenue and Contracts

As U.S. lawmakers become increasingly budget-conscious and trim the defense budget, aerospace supplier AAR (NYS: AIR) feels the pinch. Revenue in its Q1 report beat analysts' expectations, but earnings fell short. Let's look at what steps the company is taking to succeed in the future.

The numbers
Revenue rose 19% from the year-ago quarter to at $479.3 million, beating expectations of $453.2 million. AAR saw a 21% year-on-year increase in net income, but at $0.41 per share, earnings failed to meet expectations of $0.45. However, I think the company made good progress benefiting from robust demand for spare parts, and the sale of two of its aircraft didn't hurt, either. In fact, AAR has another four aircraft to be sold in the coming quarters, which will add another good chunk of revenue.

Commercial sales rose by an impressive 40%, partially because of the sale of the aircraft, which added $33.3 million to revenues. But even without that boost, the sales number would have been up 21% on the back of strong demand in spare-parts support -- the aviation supply-chain segment grew by 54% this quarter.

Sales to defense customers increased by an anemic 2% compared with the previous year's quarter. Here AAR shares company with the likes of Boeing (NYS: BA) , whose military-aircraft segment notched just 2% gains in its most recent quarter, and Lockheed Martin (NYS: LMT) , which recorded companywide growth of just 2%, even despite 9% growth in its aeronautics business.

Government and defense services formed more than 30% of AAR's revenue this quarter, and that would be a worrisome figure if not for the company's diversified product offerings. Should future defense cuts begin to chip away at revenue, it can depend more on other business segments, such as the aviation supply chain and maintenance and repair, which saw high double-digit growth.

A peek at the future
AAR recently won a $77 million contract from the Military Sealift Command to provide airlift support to U.S. Navy ships. Being chosen over four other rivals for this contract reflects the strength in the company's logistics and transportation facilities.

Another project AAR won was for the manufacturing of main-deck cargo-loading systems for EADS EFW's Airbus freight-conversion program. Although the financial specifics aren't known here, I think this deal will be beneficial in strengthen the company's position as a cargo systems provider.

AAR did suffer from seasonal weakness in its Maintenance, Repair, and Overhaul (MRO) segment. But even here there's cause for optimism, as new customer additions seem to brighten the scenario for the coming quarters.

The Foolish takeaway
Shares of AAR are trading close to their 52-week low, with a trailing P/E of 10.3. Given that the company has bagged valuable contracts and can look toward positive trends in the commercial air transport market in the coming quarters, I think the share price may be looking attractive.

Fools should keep a close eye on the developments, news, and analysis here. Add AAR to My Watchlist to stay on top of things.

At the time thisarticle was published Fool contributor Navjot Kaur owns no shares in the above-mentioned companies. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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