UPDATE: AAR Corporation (AIR) PT Raised to $47 at Stifel on Defense Driven Gross Margin Surprise

(Updated - March 25, 2021 9:20 AM EDT)

Stifel analyst Joseph W. DeNardi raised the price target on AAR Corporation (NYSE: AIR) to $47.00 (from $45.00) after the company reported adjusted revenue of $412m vs. Stifel estimate of $413m and an F3Q21 adjusted operating margin of 5.0% vs. 4.1% estimate. The company's adjusted gross margin improved from 13.9% last quarter and 16.0% last year to 16.1% driven by a 17.2% gross margin from the Defense business and 15.0% at Commercial. The Commercial gross margin is roughly inline with last year's 15.2% despite a ~40% decline in y/y commercial revenue.

The analyst maintained a Buy rating, stating "While management's commentary around F4Q sales was slightly more bearish than we were previously expecting, the underlying trend remains encouraging, and we expect AAR to be able to restore pre-COVID earnings power on a lower level of revenue given cost efficiencies extracted in the last 12 months and the meaningful-yet-hard-to-quantify partnership with Fortress. Higher level, we remain bullish regarding the return of passenger demand. While there's some uncertainty around the mix - business vs. leisure, that's more of a risk for airlines and far less so for AAR. The combination of a strong balance sheet, leverage to a recovery in passenger volumes, and meaningful margin improvement vs. pre-COVID make current valuation (10x avg. FY21E-FY23E EBITDA and 9x pre-COVID EBITDA) appealing."

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