Here's Why AAR Corp Stock Slumped Today Despite Excellent Earnings
Key Points
The acquisition makes strong strategic and operational sense and comes at a good price.
The market may be stressing debt issuance in a rising-rate environment.
Aviation aftermarket company AAR Corp (NYSE: AIR) stock declined by 6% as of 2 p.m. today. The company released its first-quarter fiscal year 2027 earnings report today, but that wasn't the reason for the decline. The results were ahead of expectations, and management upgraded its full-year sales expectations from "low double digits" to "low teens" amid "continued strength of demand across our businesses," according to CEO John Holmes on the earnings call. Instead, the market appears concerned about the separate announcement of the acquisition of a controlling interest in MRO Holdings, a maintenance, repair, and overhaul (MRO) company.
AAR buys a controlling interest
The company is buying a 65% stake in MRO Holdings for an implied enterprise value of $4 billion, representing "0.7x MRO Holdings' forecasted full calendar year 2026 adjusted EBITDA." That's a reasonable price, given that AAR currently trades at slightly less than its estimated enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) multiple of less than 11 times EBITDA.
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Moreover, the deal expands AAR's scale by adding airframe heavy-maintenance capability to its existing MRO offerings. It creates opportunities for parts, repair, and software sales while strengthening relationships with suppliers. MRO Holdings has facilities in Central and South America as well as the United States, and the deal helps expand AAR's geographic reach and service offerings for existing clients, while also opening the aerospace company to more wide-body servicing, since AAR is primarily a narrow-body servicing company now.
Image source: Getty Images.
The deal makes good sense and doesn't look expensive, not least for a controlling stake in a complementary company. That said, AAR will issue $2.1 billion in new debt to finance the deal, issue $780 million in equity to MRO Holdings shareholders, and raise $230 million through a private investment in a public equity offering. Issuing debt in a rising-rate environment may raise investor concerns, even if the deal is a good strategic fit.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aar. The Motley Fool has a disclosure policy.