AAR (NYSE:AIR): A High-Conviction Buy as Industrial and Defense Demand Surges

The industrial and defense sectors are experiencing a rare confluence of tailwinds, driven by global supply chain reconfiguration, military modernization programs, and the digitization of maintenance and logistics. AAR Corporation (NYSE:AIR) has emerged as a standout performer in this environment, leveraging its strategic positioning and operational discipline to deliver exceptional results in Q4 CY2025. With 15% year-over-year revenue growth, a 14.2% beat on adjusted EPS, and an 8.4% operating margin, AAR has demonstrated its ability to capitalize on macro trends while executing on transformative initiatives. For investors seeking durable competitive advantages and clear catalysts, AAR is a must-own industrials play.

Q4 CY2025: A Masterclass in Execution

AAR's Q4 performance underscores its resilience and agility. The company reported revenue of $755 million, a 15% increase compared to the same period in 2024, surpassing analyst estimates of $695.71 million. This growth was fueled by robust demand in new parts distribution and rotable asset sales, with commercial customer sales rising 12% and government contracts surging 21%. Adjusted diluted EPS reached $1.16, a 32% year-over-year increase and a 14.2% beat over estimates of $1.03. The operating margin expanded to 8.4%, a dramatic improvement from -0.3% in Q4 CY2024, reflecting disciplined cost management and pricing power.

These results were not accidental. AAR's strategic focus on margin expansion and portfolio optimization has created a flywheel effect. For instance, the company's adjusted EBITDA margin rose to 12.4%, up from 11.6% in Q4 CY2024, driven by operational efficiencies and a favorable sales mix.

Digital Transformation: Trax as a Growth Engine

AAR's Trax digital platform is a cornerstone of its long-term strategy. In Q4, Trax secured key contracts with Delta TechOps, Amerijet International Airlines, and SIA Engineering Company, digitizing maintenance processes for over 6,000 technicians. These agreements not only diversify AAR's revenue streams but also position it at the forefront of the eMRO (electronic maintenance, repair, and overhaul) revolution. Trax's revenue doubled to over $50 million in FY2025, with new parts distribution activities growing by over 20% organically.

The platform's scalability is a critical differentiator. By automating inventory management and predictive maintenance, Trax reduces downtime for clients while generating recurring revenue for AAR. This dual benefit creates a sticky relationship with customers, enhancing AAR's pricing power and long-term contract value.

Deleveraging and Portfolio Optimization

AAR's deleveraging efforts have further strengthened its balance sheet. Net leverage fell to 2.72x by the end of FY2025, down from 3.58x post-acquisition, as the company repurchased $10.1 million worth of shares and completed the divestiture of its Landing Gear Overhaul business. These moves unlocked $10 million in annual cost synergies and redirected capital to higher-margin opportunities.

The integration of the Product Support acquisition also contributed to margin expansion, with the Parts Supply segment reporting a 36% increase in adjusted EBITDA to $52.1 million. Meanwhile, the Integrated Solutions segment saw a 13% rise in adjusted EBITDA to $14.2 million, driven by favorable government and commercial contracts.

Segment-Driven Momentum

AAR's two core segments-Parts Supply and Integrated Solutions-are both outperforming. The Parts Supply segment generated $306 million in sales, a 17% year-over-year increase, with organic growth in new parts distribution exceeding 20%. This segment's success is tied to AAR's global inventory network and its ability to meet surging demand for aircraft parts amid supply chain bottlenecks.

The Integrated Solutions segment, meanwhile, reported $181.5 million in adjusted sales, up 10%, as government and commercial activities expanded. While near-term headwinds from Department of State cost-cutting efforts in Iraq are noted, the segment's margin profile remains resilient, with adjusted EBITDA rising to 7.8%.

Catalysts for Continued Outperformance

AAR's durable competitive advantages are underpinned by three key catalysts:
1. Trax's Scalability: With eMRO adoption accelerating, Trax is positioned to capture market share in a $10 billion industry.
2. Government Contract Expansion: AAR's 21% growth in government sales highlights its relevance in an era of heightened defense spending.
3. Margin Resilience: AAR's operating margin of 8.4% in Q4 CY2025, coupled with a deleveraged balance sheet, provides a strong foundation for reinvestment.

Conclusion: A High-Conviction Buy

AAR's Q4 results are a testament to its strategic foresight and operational excellence. By combining digital innovation, deleveraging, and segment-specific momentum, the company has created a virtuous cycle of growth and margin expansion. As industrial and defense demand surges, AAR is uniquely positioned to outperform peers, making it a high-conviction buy for investors seeking exposure to a transformative industrials play.