Intrinsic value of AAR Corp. - AIR

Previous Close

$32.27

  Intrinsic Value

$5.62

stock screener

  Rating & Target

str. sell

-83%

Previous close

$32.27

 
Intrinsic value

$5.62

 
Up/down potential

-83%

 
Rating

str. sell

We calculate the intrinsic value of AIR stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  17.30
  16.07
  14.96
  13.97
  13.07
  12.26
  11.54
  10.88
  10.29
  9.77
  9.29
  8.86
  8.47
  8.13
  7.81
  7.53
  7.28
  7.05
  6.85
  6.66
  6.50
  6.35
  6.21
  6.09
  5.98
  5.88
  5.79
  5.72
  5.64
  5.58
Revenue, $m
  2,050
  2,380
  2,736
  3,118
  3,526
  3,958
  4,415
  4,895
  5,399
  5,926
  6,477
  7,051
  7,648
  8,270
  8,916
  9,587
  10,285
  11,010
  11,764
  12,548
  13,363
  14,211
  15,094
  16,013
  16,971
  17,969
  19,010
  20,097
  21,231
  22,415
Variable operating expenses, $m
  1,943
  2,253
  2,588
  2,948
  3,331
  3,738
  4,167
  4,619
  5,093
  5,589
  6,092
  6,632
  7,194
  7,778
  8,386
  9,018
  9,674
  10,356
  11,065
  11,802
  12,569
  13,367
  14,197
  15,062
  15,962
  16,901
  17,881
  18,903
  19,970
  21,084
Fixed operating expenses, $m
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
Total operating expenses, $m
  1,942
  2,252
  2,587
  2,947
  3,330
  3,737
  4,166
  4,618
  5,092
  5,588
  6,091
  6,631
  7,193
  7,777
  8,385
  9,017
  9,673
  10,355
  11,063
  11,800
  12,567
  13,365
  14,195
  15,060
  15,960
  16,899
  17,879
  18,901
  19,968
  21,082
Operating income, $m
  108
  128
  149
  172
  196
  222
  249
  277
  307
  339
  386
  420
  456
  493
  531
  571
  612
  656
  700
  747
  795
  846
  898
  953
  1,010
  1,069
  1,131
  1,196
  1,263
  1,334
EBITDA, $m
  163
  189
  217
  247
  279
  313
  349
  387
  427
  469
  512
  557
  604
  653
  704
  757
  812
  870
  929
  991
  1,055
  1,122
  1,192
  1,264
  1,340
  1,419
  1,501
  1,587
  1,676
  1,769
Interest expense (income), $m
  4
  10
  15
  21
  28
  35
  42
  50
  58
  67
  76
  86
  96
  106
  117
  128
  140
  152
  165
  178
  192
  206
  221
  236
  252
  269
  286
  305
  324
  343
  364
Earnings before tax, $m
  99
  113
  128
  144
  161
  180
  199
  219
  240
  263
  300
  325
  350
  376
  403
  431
  460
  491
  522
  555
  589
  625
  662
  701
  741
  783
  827
  872
  920
  970
Tax expense, $m
  27
  30
  35
  39
  44
  49
  54
  59
  65
  71
  81
  88
  94
  101
  109
  116
  124
  132
  141
  150
  159
  169
  179
  189
  200
  211
  223
  235
  248
  262
Net income, $m
  72
  82
  93
  105
  118
  131
  145
  160
  176
  192
  219
  237
  255
  274
  294
  315
  336
  358
  381
  405
  430
  456
  483
  511
  541
  571
  603
  637
  672
  708

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,789
  2,077
  2,387
  2,721
  3,077
  3,454
  3,852
  4,271
  4,711
  5,171
  5,652
  6,152
  6,674
  7,216
  7,780
  8,366
  8,975
  9,608
  10,265
  10,949
  11,661
  12,400
  13,171
  13,973
  14,809
  15,680
  16,588
  17,536
  18,526
  19,560
Adjusted assets (=assets-cash), $m
  1,789
  2,077
  2,387
  2,721
  3,077
  3,454
  3,852
  4,271
  4,711
  5,171
  5,652
  6,152
  6,674
  7,216
  7,780
  8,366
  8,975
  9,608
  10,265
  10,949
  11,661
  12,400
  13,171
  13,973
  14,809
  15,680
  16,588
  17,536
  18,526
  19,560
Revenue / Adjusted assets
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
  1.146
Average production assets, $m
  431
  500
  575
  655
  740
  831
  927
  1,028
  1,134
  1,245
  1,360
  1,481
  1,606
  1,737
  1,872
  2,013
  2,160
  2,312
  2,470
  2,635
  2,806
  2,984
  3,170
  3,363
  3,564
  3,773
  3,992
  4,220
  4,458
  4,707
Working capital, $m
  666
  773
  889
  1,013
  1,146
  1,286
  1,435
  1,591
  1,755
  1,926
  2,105
  2,291
  2,486
  2,688
  2,898
  3,116
  3,343
  3,578
  3,823
  4,078
  4,343
  4,619
  4,905
  5,204
  5,515
  5,840
  6,178
  6,531
  6,900
  7,285
Total debt, $m
  279
  390
  510
  639
  776
  922
  1,076
  1,238
  1,407
  1,585
  1,770
  1,964
  2,165
  2,374
  2,592
  2,818
  3,053
  3,297
  3,551
  3,815
  4,090
  4,375
  4,673
  4,982
  5,305
  5,641
  5,992
  6,358
  6,740
  7,139
Total liabilities, $m
  691
  802
  922
  1,050
  1,188
  1,333
  1,487
  1,649
  1,819
  1,996
  2,182
  2,375
  2,576
  2,785
  3,003
  3,229
  3,464
  3,709
  3,962
  4,226
  4,501
  4,787
  5,084
  5,394
  5,716
  6,052
  6,403
  6,769
  7,151
  7,550
Total equity, $m
  1,099
  1,275
  1,466
  1,671
  1,889
  2,121
  2,365
  2,623
  2,893
  3,175
  3,470
  3,778
  4,098
  4,431
  4,777
  5,137
  5,511
  5,899
  6,303
  6,723
  7,160
  7,614
  8,087
  8,579
  9,092
  9,627
  10,185
  10,767
  11,375
  12,010
Total liabilities and equity, $m
  1,790
  2,077
  2,388
  2,721
  3,077
  3,454
  3,852
  4,272
  4,712
  5,171
  5,652
  6,153
  6,674
  7,216
  7,780
  8,366
  8,975
  9,608
  10,265
  10,949
  11,661
  12,401
  13,171
  13,973
  14,808
  15,679
  16,588
  17,536
  18,526
  19,560
Debt-to-equity ratio
  0.250
  0.310
  0.350
  0.380
  0.410
  0.430
  0.450
  0.470
  0.490
  0.500
  0.510
  0.520
  0.530
  0.540
  0.540
  0.550
  0.550
  0.560
  0.560
  0.570
  0.570
  0.570
  0.580
  0.580
  0.580
  0.590
  0.590
  0.590
  0.590
  0.590
Adjusted equity ratio
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  72
  82
  93
  105
  118
  131
  145
  160
  176
  192
  219
  237
  255
  274
  294
  315
  336
  358
  381
  405
  430
  456
  483
  511
  541
  571
  603
  637
  672
  708
Depreciation, amort., depletion, $m
  55
  61
  68
  75
  83
  92
  101
  110
  120
  130
  126
  137
  149
  161
  173
  186
  200
  214
  229
  244
  260
  276
  293
  311
  330
  349
  370
  391
  413
  436
Funds from operations, $m
  127
  143
  161
  181
  201
  223
  246
  270
  295
  322
  345
  374
  404
  435
  467
  501
  536
  572
  610
  649
  690
  733
  777
  823
  871
  921
  973
  1,027
  1,084
  1,144
Change in working capital, $m
  98
  107
  116
  124
  132
  141
  148
  156
  164
  171
  179
  186
  194
  202
  210
  218
  227
  236
  245
  255
  265
  276
  287
  299
  311
  324
  338
  353
  369
  385
Cash from operations, $m
  28
  36
  45
  56
  69
  82
  97
  114
  131
  150
  166
  188
  210
  233
  257
  283
  309
  337
  365
  395
  425
  457
  490
  524
  560
  596
  635
  674
  716
  759
Maintenance CAPEX, $m
  -34
  -40
  -46
  -53
  -61
  -69
  -77
  -86
  -95
  -105
  -115
  -126
  -137
  -149
  -161
  -173
  -186
  -200
  -214
  -229
  -244
  -260
  -276
  -293
  -311
  -330
  -349
  -370
  -391
  -413
New CAPEX, $m
  -63
  -69
  -75
  -80
  -86
  -91
  -96
  -101
  -106
  -111
  -116
  -121
  -125
  -131
  -136
  -141
  -147
  -152
  -158
  -165
  -171
  -178
  -185
  -193
  -201
  -210
  -219
  -228
  -238
  -249
Cash from investing activities, $m
  -97
  -109
  -121
  -133
  -147
  -160
  -173
  -187
  -201
  -216
  -231
  -247
  -262
  -280
  -297
  -314
  -333
  -352
  -372
  -394
  -415
  -438
  -461
  -486
  -512
  -540
  -568
  -598
  -629
  -662
Free cash flow, $m
  -69
  -73
  -76
  -77
  -78
  -77
  -75
  -73
  -70
  -65
  -64
  -59
  -53
  -46
  -39
  -32
  -24
  -16
  -7
  1
  10
  19
  28
  38
  47
  57
  67
  77
  87
  97
Issuance/(repayment) of debt, $m
  102
  111
  120
  129
  137
  146
  154
  162
  170
  178
  185
  193
  201
  209
  218
  226
  235
  244
  254
  264
  275
  286
  297
  310
  323
  336
  351
  366
  382
  399
Issuance/(repurchase) of shares, $m
  90
  94
  97
  100
  101
  100
  99
  97
  94
  91
  76
  71
  65
  59
  52
  45
  38
  30
  23
  15
  6
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  192
  205
  217
  229
  238
  246
  253
  259
  264
  269
  261
  264
  266
  268
  270
  271
  273
  274
  277
  279
  281
  286
  297
  310
  323
  336
  351
  366
  382
  399
Total cash flow (excl. dividends), $m
  124
  132
  142
  151
  160
  169
  178
  186
  195
  203
  197
  205
  213
  222
  231
  240
  249
  259
  269
  280
  291
  305
  326
  347
  370
  393
  417
  443
  469
  496
Retained Cash Flow (-), $m
  -162
  -177
  -191
  -205
  -218
  -232
  -245
  -257
  -270
  -282
  -295
  -307
  -320
  -333
  -346
  -360
  -374
  -389
  -404
  -420
  -437
  -454
  -473
  -492
  -513
  -535
  -558
  -582
  -608
  -635
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  -39
  -44
  -49
  -54
  -58
  -63
  -67
  -71
  -75
  -80
  -98
  -103
  -107
  -111
  -115
  -120
  -125
  -130
  -135
  -140
  -146
  -150
  -147
  -145
  -143
  -142
  -141
  -140
  -139
  -139
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  -37
  -40
  -43
  -44
  -45
  -45
  -45
  -44
  -43
  -42
  -47
  -44
  -41
  -37
  -34
  -31
  -27
  -24
  -21
  -18
  -15
  -12
  -10
  -7
  -6
  -4
  -3
  -2
  -2
  -1
Current shareholders' claim on cash, %
  92.6
  86.5
  81.3
  77.0
  73.4
  70.3
  67.7
  65.4
  63.5
  61.9
  60.7
  59.7
  58.9
  58.2
  57.6
  57.2
  56.8
  56.6
  56.4
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3
  56.3

AAR CORP. (AAR) is a provider of services and products to the commercial aviation and government and defense markets. The Company operates in two segments: Aviation Services, which consists of supply chain and maintenance, repair and overhaul (MRO) activities, and Expeditionary Services, which includes airlift and mobility activities. Its services and products include aviation supply chain and parts support programs; MRO of aircraft and landing gear; design and manufacture of specialized pallets, shelters and containers; expeditionary airlift services; aircraft modifications, and aircraft and engine sales and leasing. It serves commercial, defense and governmental aircraft fleet operators, original equipment manufacturers and independent service providers around the world. Its landing gear overhaul facility is in Miami, Florida, where it repairs and overhauls landing gear, brakes and actuators for various types of commercial and military aircraft.

FINANCIAL RATIOS  of  AAR Corp. (AIR)

Valuation Ratios
P/E Ratio 19.4
Price to Sales 0.6
Price to Book 1.2
Price to Tangible Book
Price to Cash Flow 50.4
Price to Free Cash Flow -92.4
Growth Rates
Sales Growth Rate 4.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -61.4%
Cap. Spend. - 3 Yr. Gr. Rate 10.1%
Financial Strength
Quick Ratio 5
Current Ratio 0.4
LT Debt to Equity 17%
Total Debt to Equity 17.2%
Interest Coverage 20
Management Effectiveness
Return On Assets 4%
Ret/ On Assets - 3 Yr. Avg. 3.2%
Return On Total Capital 5.5%
Ret/ On T. Cap. - 3 Yr. Avg. 3.7%
Return On Equity 6.4%
Return On Equity - 3 Yr. Avg. 4.4%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 15.7%
Gross Margin - 3 Yr. Avg. 12.6%
EBITDA Margin 7.4%
EBITDA Margin - 3 Yr. Avg. 4.4%
Operating Margin 4.5%
Oper. Margin - 3 Yr. Avg. 1%
Pre-Tax Margin 4.2%
Pre-Tax Margin - 3 Yr. Avg. 0.2%
Net Profit Margin 3.2%
Net Profit Margin - 3 Yr. Avg. 2.2%
Effective Tax Rate 32.4%
Eff/ Tax Rate - 3 Yr. Avg. 33.8%
Payout Ratio 17.5%

AIR stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AIR stock intrinsic value calculation we used $1748 million for the last fiscal year's total revenue generated by AAR Corp.. The default revenue input number comes from 0001 income statement of AAR Corp.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AIR stock valuation model: a) initial revenue growth rate of 17.3% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AIR is calculated based on our internal credit rating of AAR Corp., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of AAR Corp..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AIR stock the variable cost ratio is equal to 94.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $-1 million in the base year in the intrinsic value calculation for AIR stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for AAR Corp..

Corporate tax rate of 27% is the nominal tax rate for AAR Corp.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AIR stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AIR are equal to 21%.

Life of production assets of 10.8 years is the average useful life of capital assets used in AAR Corp. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AIR is equal to 32.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $936.3 million for AAR Corp. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 35.098 million for AAR Corp. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of AAR Corp. at the current share price and the inputted number of shares is $1.1 billion.

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