Is AAR’s Valuation Still Attractive After Its Strong Multi Year Share Price Rally?

• If you are wondering whether AAR is still worth buying after its big run, or if most of the upside has already been priced in, you are not alone.
• The stock has cooled slightly over the last week, down 2.2%, but it is still up 4.2% over the past month, 32.9% year to date, 35.2% over 1 year, 90.9% over 3 years, and 130.7% over 5 years. This shows that investors have been steadily rerating the story.
• Recent headlines have focused on AAR winning new long term aviation services and parts supply contracts and expanding its relationships with key defense and commercial customers. This reinforces the idea that its niche in the aerospace aftermarket is strengthening. At the same time, analysts and industry commentators have been highlighting the structural recovery in global air traffic and maintenance spending, which helps explain why the market has been willing to reward the stock despite bouts of short term volatility.
• Even so, AAR only scores a 2/6 valuation check score. In the rest of this article we will break down what different valuation methods say about the stock today and then finish by looking at a more complete way of thinking about its value beyond the usual metrics.

AAR scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: AAR Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates what a business is worth today by projecting its future cash flows and discounting them back to the present.

For AAR, the model uses a 2 Stage Free Cash Flow to Equity approach. The latest twelve month Free Cash Flow is slightly negative at about $27 million, reflecting recent investment and working capital swings, and analysts expect a rapid recovery. Free Cash Flow is projected to reach around $203 million by 2028, with further growth extrapolated out to roughly $589 million by 2035 based on gradually slowing growth assumptions.

When all these future cash flows are discounted back to today in dollars, the resulting intrinsic value is about $191.45 per share, implying the stock is roughly 57.2% undervalued versus the current market price. That indicates investors may not be fully pricing in the cash flow ramp implied by these projections.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests AAR is undervalued by 57.2%. Track this in your watchlist or portfolio, or discover 917 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for AAR.

Approach 2: AAR Price vs Earnings

For profitable companies like AAR, the price to earnings (PE) ratio is a straightforward way to gauge how much investors are paying for each dollar of current earnings. A higher PE can sometimes be associated with strong growth prospects and relatively low risk, while slower growth or higher uncertainty usually calls for a lower, more conservative multiple.

AAR currently trades on a PE of about 112.1x, which is above both the aerospace and defense industry average of roughly 36.5x and the peer group average of around 52.3x. To refine this comparison, Simply Wall St uses a Fair Ratio of 53.0x, which is the PE that might be expected given AAR’s earnings growth outlook, margins, industry, market capitalization and risk profile.

This Fair Ratio can be more informative than a simple peer or industry comparison because it adjusts for company specific characteristics rather than assuming all firms warrant the same multiple. Comparing AAR’s current 112.1x PE to the 53.0x Fair Ratio suggests the market is pricing in more optimism than the fundamentals alone support on this metric.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1455 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your AAR Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce Narratives, a simple way for you to tell the story behind your numbers by linking your view of AAR’s future revenues, earnings and margins to a financial forecast, a fair value estimate, and ultimately a buy or sell decision. On Simply Wall St’s Community page, millions of investors create Narratives by setting their own assumptions and fair values, then comparing those to the current share price to decide whether AAR looks attractively priced or stretched. Because Narratives are updated dynamically when new information, such as earnings results or contract announcements, comes in, they stay aligned with the latest outlook rather than a static snapshot. For AAR today, one investor might build a bullish Narrative around sustained high single digit revenue growth, expanding margins and a fair value above the current analyst consensus of $92.25. Another could focus on competitive and cyclical risks, assume slower growth, lower margins and a fair value well below that level. Both perspectives become clear, quantified roadmaps rather than vague opinions.

Do you think there's more to the story for AAR? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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