Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how AAR Corp (AIR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): 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.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$1,169,502,671||Fail|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.65||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||13.13%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||23.05||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.30||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.65||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.28||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-1.09%|
|MG Value based on 3% Growth||$21.73|
|MG Value based on 0% Growth||$12.74|
|Market Implied Growth Rate||7.27%|
|% of Intrinsic Value||364.57%|
AAR Corp. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg ratio. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.62 in 2014 to an estimated $1.5 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into AAR Corp. revealed the company was trading above its Graham Number of $33.71. The company pays a dividend of $0.3 per share, for a yield of 0.9% Its PEmg (price over earnings per share – ModernGraham) was 23.05, which was above the industry average of 22.62. Finally, the company was trading above its Net Current Asset Value (NCAV) of $8.71.
AAR Corp. receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$8.71|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||5/1/2017|
|Total Current Assets||$888,500,000|
|Total Current Liabilities||$335,100,000|
|Shares Outstanding (Diluted Average)||34,300,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.90|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.50|
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.