Long-Term Engine Maintenance Demand Will Drive Sustained Earnings Expansion

Catalysts

About StandardAero

StandardAero provides maintenance, repair and overhaul services for commercial, business and military aircraft engines and components across a diversified global platform.

What are the underlying business or industry changes driving this perspective?

• Accelerating LEAP engine inductions, a growing backlog and expanding OEM authorized repair content position StandardAero to scale toward roughly $1 billion of LEAP revenue in the next few years. This is expected to support sustained double digit top line growth and higher earnings as the program turns margin positive in 2026.
• Expansion of high value engine programs such as CFM56, CF34 and HTF7000, supported by new facilities in DFW, Winnipeg and Augusta, increases capacity in the most in demand fleets and is expected to drive durable revenue growth and operating leverage as utilization ramps.
• Structural contract changes that remove $300 million to $400 million of zero margin material pass through revenue will make reported margins more reflective of underlying profitability and materially improve working capital efficiency and free cash flow conversion from 2026 into 2027.
• Record profitability in Component Repair Services, a growing licensed repair portfolio and increased in sourcing from prior acquisitions build a higher mix of proprietary, higher margin work that can lift consolidated net margins and earnings over time.
• Rising global engine flight hours in commercial and business aviation, combined with a growing installed base on long lived platforms such as LEAP and HTF7000, support a long runway of recurring MRO demand that is expected to contribute to compounding revenue and EBITDA growth through industry cycles.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming StandardAero's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $549.2 million (and earnings per share of $1.64) by about December 2028, up from $184.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $677.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, down from 48.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 37.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or worsening shortages in constrained parts such as forgings and castings could continue to delay engine shipments, leading to elevated contract assets, weaker than expected free cash flow conversion and potential pressure on earnings if timing issues become structural rather than temporary.
• The LEAP and CFM56 DFW programs are currently dilutive at zero margin and rely on a smooth learning-curve transition to become margin positive in early 2026, so any operational setbacks, slower ramp, or lower than expected full performance shop visits could delay margin inflection and weigh on consolidated net margins and earnings growth.
• Structural contract changes that remove $300 million to $400 million of pass-through revenue will make reported margins look higher but reduce headline growth, so if end market demand or pricing softens at the same time, investors may reassess growth expectations and compress the valuation multiple, impacting the share price more than the relatively stable underlying EBITDA and earnings.
• The business aviation and LEAP driven commercial growth thesis assumes sustained increases in flight hours and new aircraft production over the next 20 to 30 years, so a cyclical downturn in air travel, changes in corporate jet utilization or OEM delivery cuts could reduce MRO volumes, slowing revenue growth and limiting operating leverage.
• The strategy depends on continued expansion of high margin Component Repair Services, including synergy capture from acquisitions and growing OEM authorizations, so increased OEM insourcing, tougher licensing terms or weaker demand from third party MRO customers facing their own supply chain issues could cap CRS growth and erode its contribution to consolidated margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $35.5 for StandardAero based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $549.2 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $26.56, the analyst price target of $35.5 is 25.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.