Fixing to Fly: The Top Aviation Stock to Buy Now
I piloted my first successful helicopter takeoff about 23 years ago, in a Bell Long Ranger while attending the Bell Helicopter Training Academy in Fort Worth, Texas.
I must have had a smug, self-satisfied look on my face, because my pilot instructor pointedly said: “You can’t propel yourself forward by patting yourself on the back.”
I’ve been reminded of those words lately, as the bull market persists in defying gravity. There’s another way to express my instructor’s warning: past performance is no guarantee of future results.
As the major U.S. stock market indices hover at record highs, don’t pat yourself on the back for your gains so far this year. It’s time to add some “defensive growth” to your portfolio.
Portfolio hedges sometimes come in unlikely forms. Below, I pinpoint a stock that confers outsized growth potential, protection against a downturn, and even a hedge against inflation. And it’s a bargain, to boot.
Chances are, you’ve never heard of the company. It’s in the aviation sector and it’s a play on the sector’s rebound from COVID-induced economic damage.
As I’ve noted in previous articles, one shrewd move now is to consider high-quality stocks in the booming aerospace/defense sector.
Several military aviation stocks are poised to not only outperform but also weather any turbulence ahead. Today, I spotlight a hybrid aviation stock with a global presence in both the commercial and military sectors. It’s a technology play, too.
Come Fly With Me…
If you’re a regular reader of this newsletter, you know that I love to fly helicopters. That’s a picture of me in the cockpit of a Sikorsky Schweitzer 330, about to take off.
I understand a thing or two about aviation, so believe me when I tell you that the following stock is one of the best growth stories around: AAR (NYSE: AIR), a provider of maintenance, repair and overhaul (MRO) services to operators and manufacturers of rotorcraft and fixed-wing airplanes.
Aerospace is in the ascendancy again, but many of the industry’s well-known names offer limited upside. AAR, on the other hand, is set for the sort of market-beating gains that its more famous peers would envy.
Boeing’s MAX 9 Woes
In recent weeks, the topic of airline maintenance has been dominating the news headlines.
An incident on January 5 unfolded as a Boeing 737 MAX 9, operated by Alaska Airlines, experienced a midair mishap with a fuselage panel (aka “door plug”) that’s designed to serve as a potential additional exit.
Shortly after take-off from Portland, Oregon, en route to Ontario airport on the outskirts of Los Angeles, the door plug was unexpectedly torn off. Fortunately, the skilled response of the flight crew led to a successful emergency landing, avoiding any casualties.
In the aftermath of this incident, both Alaska Airlines and United Airlines, which combined operate the world’s largest fleet of this aircraft model, disclosed the discovery of loose bolts on several of their 737 MAX 9 planes.
Responding to these developments, the U.S. Federal Aviation Administration (FAA) issued an “Emergency Airworthiness Directive” on January 6 for all owners and operators of 737 MAX 9 aircraft.
On January 11, the FAA announced that it had started an investigation into whether Boeing neglected to ensure the MAX 9 was manufactured to match the design approved by the agency.
In the context of these events, MRO firms such as AAR are in the spotlight. On January 5, AAR issued a statement confirming that it did not perform any work on or near any mid-cabin exit door plug of the Boeing MAX 9, which came as a relief to AAR shareholders.
On January 26, existing MAX 9 planes were cleared by the FAA to start flying again, but the agency froze future production of the jets pending further investigation.
AAR’s stock price has risen in recent days and it’s knocking on the door of its 200-day moving average, which indicates momentum.
AAR’s earnings per share (EPS) growth projections are strong. Next quarter’s earnings estimate for AIR is $0.83 with a range of $0.81 to $0.86. The previous quarter’s EPS was $0.81. Over the past 12 months, AIR beat its EPS estimate 100.00% of the time, while its overall industry beat the EPS estimate about 62% of the time during the same period.
And yet, until the MAX 9 incident this month, the company scarcely got a mention on CNBC and the other television noise machines. Mechanics in dirty overalls are perhaps considered too boring a topic, but it’s these boring wrench turners on the ground who keep aircraft in the air.
Headquartered in Wood Dale, Illinois, AAR boasts a vast global footprint and ranks as the biggest independent MRO provider in the U.S. by annual man-hours generated.
With a market cap of $2 billion, AAR is the largest, publicly traded direct play on MRO growth, but it’s still a “mid-cap.”
Mid-caps are generally defined as companies with valuations between $2 billion and $10 billion. I particularly like mid-caps because they’re small enough to offer greater capital appreciation potential than their large-cap brethren, but they possess more financial wherewithal (and they tend to be less volatile) than the small fry.
AAR is something of a rarity. Most major OEMs and airlines have created in-house MRO shops, but AAR is an independent MRO that combines the technological innovation and nimbleness of a smaller company, with sufficient economies of scale to keep down its costs.
AAR enjoys tailwinds from aerospace growth in the commercial, business and military sectors. The company operates in two segments, Aviation Services and Expeditionary Services.
The Aviation Services segment offers aftermarket support, inventory management, and distribution services.
The Expeditionary Services segment provides products and services supporting the movement of equipment and personnel by the U.S. Department of Defense, foreign governments, and non-governmental organizations.
Demand for MRO is particularly strong these days, as air travel recovers from its slump. Air carriers are generating healthy operating revenue again (see chart).
The global economic recovery remains on track and it’s prompting consumers to open their wallets for plane tickets and airlines are dipping into their coffers to make long-deferred repairs and upgrades.
At the same time, a huge surge in global military spending should benefit AAR. The Russia-Ukraine war, and strife in Gaza and the Red Sea, are prompting Western governments to plow more resources into aerospace/defense.
The company’s major clients include Boeing (NYSE: BA), the mega-cap maker of commercial airliners and military planes. Domestic and international airlines are clients as well.
As stocks in highly cyclical sectors gyrate according to the latest economic data or political crisis, AAR over the long term has been a “steady Eddy” performer. The equation is simple: without this company’s services, aircraft can’t fly.
Defense spending remains massive and it’s on a long-term upward trajectory, which shields companies such as AAR from temporary economic downturns and market setbacks. Consistently high Pentagon spending also provides insurance against unexpected spikes in inflation.
With a forward 12-month price-to-earnings ratio (FPER) of 16.9, AAR’s stock is a bargain compared to the FPER of the aerospace industry (28) and the S&P 500 (19.6). The stock also is a bargain compared to its growth prospects.
Got any questions or comments? I’d especially like to know how you’ve fared with my recommended trades. Share your stories: email@example.com.
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John Persinos is the editorial director of Investing Daily.
This article previously appeared on Investing Daily.