AAR Corp (AIR): Margins, Software, and Industry Tailwinds Fuel Buy Opportunity

AAR Corp (AIR) is emerging as a compelling investment opportunity, driven by margin expansion, strategic software adoption, and a favorable industry outlook. With a Zacks #2 Buy rating and a valuation that lags its growth trajectory, the company is primed for near-term outperformance. Let's dissect the catalysts pushing this aerospace services provider higher.

Margin Expansion: A Structural Turnaround

AAR's Q2 2025 results underscore a transformation in profitability. Adjusted EBITDA margins rose to 11.4% in Q2, up from 10.1% a year earlier, fueled by commercial sales growth and operational synergies from its Product Support acquisition. Sequentially, the Repair & Engineering segment delivered a 9.2% operating margin, up from 9.1%, signaling sustained efficiency gains.

Management projects further margin improvements in 2026 as hangar expansions in Miami and Oklahoma City boost capacity. These investments, coupled with the divestiture of its low-margin Landing Gear Overhaul business, position AAR to achieve a net leverage ratio of 2.72x—well within its target range. With $51 million from the divestiture boosting liquidity, the company is capitalizing on high-margin segments like Parts Supply, which saw sales jump 30% year-over-year in Q2.

Trax Software: The Next Growth Frontier

While Trax software adoption metrics for July 2025 remain undisclosed, the strategic partnership with Delta TechOps signals transformative potential. Trax's cloud-based solutions, deployed across 6,000 technicians in Delta's maintenance network, are digitizing processes like heavy maintenance and engineering. This rollout is just the first phase—expansion into eMobility apps and quality management systems could unlock recurring revenue streams.

AAR's CEO, John M. Holmes, emphasized Trax's role in supporting large airline clients, a market where AAR's scale and technical expertise give it an edge. As airlines prioritize digital transformation, Trax's modular design allows incremental upgrades, making it a flexible tool for customers like Singapore Airlines and Air France-KLM.

Industry Tailwinds: Air Travel Growth and Defense Demand

The Aerospace-Defense Equipment industry, ranked #66 by Zacks (top 27% of industries), is benefiting from 5.8% global air traffic growth in 2025 and robust defense spending. AAR is well-positioned to capitalize on both:
- Commercial demand: Strong parts distribution and repair contracts (e.g., a $80 million deal with the U.S. Air Force)
- Government contracts: Wins with Delta TechOps and SIA Engineering highlight cross-sector diversification

Despite supply-chain risks and aircraft delivery backlogs, AAR's focus on high-margin services and software mitigates these headwinds.

Valuation and Catalysts: Why Now?

AAR trades at just 0.99x sales, a discount to peers, despite its 19.8% YTD stock gain versus the S&P 500's 6.2%. The Zacks #2 Buy rating reflects positive earnings estimate revisions, with consensus projecting $4.51 EPS for FY2025—up 17% year-over-year. Key catalysts include:
1. Q4 2025 results (July 16 release): Expected to show Trax's contribution to margins and revenue. Historical data shows earnings releases since 2022 have been positively received, with the stock averaging a 1.2% gain on the day of the announcement and a maximum one-day return of 2.03% in July 2024.
2. Margin guidance: Management's confidence in FY2026 improvements could spark multiple expansion.
3. Share buybacks: With $52.5 million remaining under its $150 million authorization, opportunistic repurchases could lift EPS further.

Risks to Consider

• FCPA-related charges: The $31 million GAAP net loss in Q2 stemmed from a settlement, but adjusted metrics exclude this.
• Integration risks: The Product Support acquisition's full benefits depend on seamless execution.

Final Take: Buy Before Earnings Move the Needle

AAR's combination of margin-driven profitability, software-driven growth, and a Zacks-ranked sector make it a standout play in aerospace. With valuation metrics undervaluing its strategic assets and near-term catalysts aligning for upside, investors should consider initiating a position ahead of the July earnings report. The Zacks #2 Buy rating and momentum score of B suggest this stock is primed to outperform peers in the coming quarters.

The time to act is now—before the market fully prices in AAR's improving fundamentals.