AAR Corporation: A High-Conviction Buy in the Aerospace Aftermarket's Golden Era

The aerospace aftermarket is undergoing a transformative phase, driven by surging air travel demand, AI-powered operational efficiency, and a global focus on extending aircraft lifecycles. Amid this backdrop, AAR Corporation (NYSE: AAR) stands out as a rare blend of disciplined operational execution and strategic foresight. With a 26% year-over-year revenue surge in Q2 2025, margin expansion of 110 basis points to 9.2%, and a clear roadmap for digital innovation, AAR is not just riding the industry's tailwinds—it's engineering them.

Operational Execution: The Engine Behind Margin Expansion

AAR's Q2 2025 results underscore its ability to translate industry tailwinds into outsized profitability. Consolidated revenue hit $686.1 million, driven by a 30% surge in commercial sales post the Triumph Product Support acquisition and a 16% rise in government sales. Adjusted EBITDA soared 42% to $78 million, with margins expanding to 11.4%—a testament to portfolio optimization (e.g., divesting the unprofitable Landing Gear Overhaul business) and cost synergies from the Product Support integration.

The company's Repair & Engineering segment, a critical driver of margin expansion, has leveraged AI and predictive analytics to reduce downtime and improve parts utilization. For instance, AAR's Trax software suite—now generating $50 million in annual revenue—has become a digital backbone for airlines, enabling real-time maintenance tracking and resource allocation. This technological edge is translating into sticky customer relationships and pricing power.

Strategic Positioning: Aligning with Industry Megatrends

The aerospace aftermarket is projected to grow at a 6–8% CAGR through 2030, fueled by post-pandemic air travel recovery and supply chain bottlenecks. AAR's recent moves position it to capture disproportionate value:
- Digital MRO Leadership: AAR's Trax software is being adopted by major airlines like Delta, which selected Trax to modernize its $1.5 billion maintenance operations. This contract, one of the largest in the ERP space, validates AAR's vision of digitizing MRO workflows.
- Infrastructure Expansion: AAR's hangar expansions in Oklahoma City and Miami, set to add 15% to its MRO capacity by 2026, are already fully contracted. These facilities will leverage paperless workflows and AI-driven diagnostics, ensuring cost efficiency and scalability.
- Government & Defense Synergies: AAR's Supply Chain Alliance with the U.S. Defense Logistics Agency (DLA) in 2025 has streamlined procurement for critical parts, enhancing its role in national defense logistics.

Margin Resilience and Capital Discipline

Despite a $57.1 million FCPA settlement in Q2 2025, AAR's adjusted EPS grew 11% year-over-year to $0.90, demonstrating the strength of its core operations. The company's net leverage ratio has improved from 3.06x to 2.72x, supported by $22 million in operating cash flow and $48 million from the Landing Gear divestiture. This financial discipline allows AAR to fund its $100 million share repurchase program while maintaining a robust balance sheet.

Investment Case: High Conviction in a High-Growth Sector

AAR's stock trades at a forward P/E of 12x and a P/EBITDA of 8x, well below its historical averages, despite its 20% revenue growth and 11.4% EBITDA margins. This discount reflects market skepticism about the FCPA charges and short-term volatility, but not the company's long-term potential.

Key Catalysts for 2025–2026:
1. Trax Revenue Doubling: With Delta's $1.5 billion contract and potential wins in the defense sector, Trax could drive $100 million in annual revenue by 2026.
2. Hangar Capacity Utilization: The Miami and Oklahoma expansions will add $50–70 million in annual revenue by 2026, with margins supported by digital workflows.
3. Product Support Synergies: Full integration of Triumph Product Support is expected to deliver $10 million in annual cost savings by 2026.

Conclusion: AAR as a Strategic Buy

AAR is not just a beneficiary of the aerospace aftermarket's growth—it is a catalyst. Its ability to execute on margin expansion, leverage AI and digital tools, and align with industry trends positions it as a high-conviction buy. For investors seeking exposure to the next phase of the aviation recovery, AAR offers a compelling combination of near-term visibility and long-term scalability. With a target price of $65–$70 (up 20–30% from current levels), the risk-reward profile is skewed to the upside.

Note: All data as of July 14, 2025. Investors should conduct independent due diligence and consider macroeconomic risks, including interest rates and geopolitical volatility.