Hook / Thesis
AAR Corp. is a quietly attractive industrial play on two durable trends - higher MRO (maintenance, repair and overhaul) intensity across commercial fleets and elevated government/defense logistics spending. The company reported 2Q FY2026 (period ended 11/30/2025) revenue of $795.3 million and net income of $34.6 million, while management delivered an earnings and revenue beat on the 01/06/2026 print. Those numbers, combined with a large inventory position and ample scale across parts, repair & engineering, and fleet solutions, make AAR well positioned to capture near-term demand/supply dislocations in parts and services.
My trade idea: take a long position on AIR on a modest pullback or at current levels as a tactical swing into a multimonth position. The company is already showing sequential revenue and EPS improvement, and the market is re-pricing the security for better structural growth in MRO and defense spending. Below I summarize the business, show the supporting numbers, outline valuation framing, list catalysts and risks, and give an explicit entry/stop/targets plan.
Why the market should care - the business in one paragraph
AAR operates across four complementary businesses: (1) parts supply - sales and leasing of USM and aftermarket distribution; (2) Repair & Engineering - airframe maintenance, component repair and landing gear overhaul; (3) Integrated Solutions - fleet management and performance-based logistics (notably for the U.S. Department of Defense); and (4) Expeditionary Services supporting movement of equipment and personnel for governments and NGOs. That breadth makes AAR a mid-sized integrator that benefits when airline and defense customers prioritize reliability and supply-chain resilience - exactly the environment we're in now.
Evidence from the recent filings
- Revenue strength: 2Q FY2026 revenue was $795.3M (period ended 11/30/2025), up from $739.6M in the prior quarter - about a +7.5% sequential increase.
- Profitability: Gross profit for the quarter was $156.9M and operating income $48.1M, implying a gross margin ~19.7% and an operating margin around 6.1% on the quarter.
- Net income and EPS: Net income attributable to the parent was $34.6M; diluted EPS for 2Q FY2026 was ~$0.90. The quarter beat consensus (EPS actual in the earnings calendar noted at 1.18 in the same release cycle, reflecting some adjustments reported alongside the filing).
- Balance sheet and liquidity: Total assets were $3.2425B and equity stood at $1.5612B as of 11/30/2025. Current assets were $1.6903B vs. current liabilities $594.2M - the company carries a strong current ratio and meaningful working capital to service parts demand.
- Inventory is large and strategic: Inventory was $910.8M in 2Q FY2026 (up vs. prior quarters), which is a double-edged sword but in the current parts-scarcity environment represents a competitive advantage for quick-turn aftermarket supply.
- Cash flow / investing: Operating cash flow for the quarter was positive ($13.6M) but the company invested heavily in the quarter (net investing cash flow -$213.3M) while financing flows were +$204.3M (likely funding the investments). These are items to monitor, but they reflect management reinvesting to support growth and capability upgrades.
Valuation framing - measured and practical
The dataset does not provide a stated market capitalization; using the most recent trade price (~$105.91) and diluted average shares reported in the quarter (38.1M), a reasonable proxy market cap is approximately $4.0 billion (38.1M x $105.91 = ~$4.04B). I acknowledge diluted average shares are an average and not an exact outstanding share count, but this gives a practical valuation anchor.
On that basis:
| Metric | Calculation | Value (approx) |
|---|---|---|
| Implied Market Cap | Price x diluted average shares (proxy) | $4.0B |
| Price / Book | Implied market cap / Book Equity ($1.5612B) | ~2.6x |
| Implied P/E (run-rate) | Price / annualized EPS (approx: Q1+Q2 net income annualized) | ~28-30x |
Context - that P/E is elevated versus long-cycle industrial averages but not unreasonable for a company showing margin improvement, secularly growing MRO demand and exposure to defense logistics. We do not have a complete debt and cash breakout in the dataset to compute EV, so EV-based multiples are omitted here.
Catalysts (2-5)
- Continuing MRO growth - industry reports in January 2026 expect the MRO market to grow at ~5.9% CAGR; continued fleet utilization and older aircraft in service should drive spare parts and service demand.
- Defense logistics contracts and tailwinds - incremental U.S. and allied defense funding supports Integrated Solutions and Expeditionary Services demand.
- Inventory-led revenue capture - AAR's near-$911M inventory lets it fill orders faster than smaller competitors if supply chains remain tight.
- Margin expansion from higher mix of services and aftermarket sales - operating income of $48.1M in the quarter indicates room to leverage fixed cost as revenue grows.
- Near-term catalysts: contract awards, quarterly margin beats, improved operating cash flow and disclosure of capital deployment plans (buybacks/dividend reinstitution) would be direct positive triggers.
The trade - entry, stop, targets, and sizing guidance
This is a medium-risk long trade designed for a swing-to-position time horizon (3-9 months):
- Entry: 1) Primary entry: on weakness between $100.00 and $106.50 (buy limit or ladder). 2) Alternate: buy up to $108 if momentum carries, but use tighter stops.
- Stop: $95.00 (below recent intraday supports visible in the price history). This equates to roughly 9-10% downside from current trade levels and respects recent trading ranges.
- Targets: 1) Near-term target: $120 (roughly +13% from current). 2) Secondary target: $140 (roughly +32%). Take partial profits at the first target and hold a position into the second target if fundamentals/catalysts continue to play out.
- Position sizing: keep any single position to a size that limits portfolio drawdown to an acceptable level if the $95 stop is hit (e.g., risk 1-2% of portfolio). This remains a mid-cap industrial exposed to cyclical demand and contract timing.
Risks and counterarguments
Every trade has downside vectors. I list the principal risks and at least one counterargument to my bullish thesis:
- Defense/congressional spending risk: AAR derives a meaningful portion of specialty logistics revenue from government contracts. Sudden changes or delays in defense budgets, or contract timing shifts, could depress near-term revenue.
- Inventory risk / working capital strain: Inventory is nearly $911M. If demand softens or parts values fall, inventory carrying costs and markdowns could pressure margins and cash flow.
- Execution risk on investments: The company invested heavily in the most recent quarter (net investing -$213.3M). If those investments don’t yield higher returns, ROIC could suffer and financing costs could rise.
- Macro cyclical slowdown: Airline traffic or cargo demand could soften if macro conditions deteriorate - MRO demand is correlated with flying hours and airline health.
- Valuation sensitivity: The implied P/E near ~30x (run-rate) already embeds improvement; a miss in margins or profit growth would likely trigger multiple contraction.
Counterargument (what bears will say)
Bears will point to the high inventory, heavy investing in the quarter and a valuation that already prices in growth. If those investments are financed with additional leverage or if demand growth disappoints, AIR could see a sharp re-rating. That is a valid argument; the trade uses a clear stop for that contingency.
What would change my view
- I would upgrade conviction (add to position) if AAR reports consistent quarter-over-quarter margin expansion, stronger free cash flow (operating cash flow turning meaningfully positive while capex normalizes), and wins of multi-year logistics contracts tied to defense funding.
- I would reduce conviction or flip bearish if inventory turns negative (inventory builds concurrent with revenue declines), operating cash flow deteriorates further, or management signals disappointing contract wins or a pull-back in capital deployment plans.
Note on data and assumptions: I used the reported quarter (2Q FY2026 filing accepted 01/06/2026) figures: revenues $795.3M, gross profit $156.9M, operating income $48.1M, net income $34.6M, and inventory $910.8M. Market-cap approximation used the latest trade price and diluted average shares as a practical proxy; exact market cap and outstanding shares should be confirmed for sizing larger institutional trades.
Bottom line / Conclusion
AAR is a sensible tactical long: the company sits squarely in the MRO and defense logistics sweet spot, is showing sequential revenue and earnings improvement, and holds inventory that lets it win aftermarket orders when supply remains tight. The combination of secular MRO demand, a recent beat, and a measurable pathway to margin expansion gives a constructive risk/reward in the $100-$106 entry band. Use the $95 stop and the $120 / $140 targets above to manage the trade. Keep position sizes modest given macro and execution risks.
If management fails to convert current investments into higher cash flow and contract wins, or if inventory dynamics reverse, I would become more cautious quickly. For now, this is a trade that favors disciplined buyers of a high-quality mid-cap aerospace & defense services franchise.
Selected references from filings
Filing: AAR 10-Q (accepted 01/06/2026) (period ended 11/30/2025). Earnings release reported 01/06/2026 (EPS & revenue beat).