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Author: lobodoug Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 62  
Subject: AIR: Value Play in a Small Cap Growth Stock Date: 5/27/2008 8:49 PM
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Highlights of AIR’s recent quarterly report (3rd Quarter, 08) (from Investor Presentation):


►Record quarterly sales of $376.6M and record income from continuing operations of $20.3M
►39%sales growth and 31%growth in income from continuing operations
►Operating margin 10.1%vs. 9.4%previous year
►Record diluted EPS from continuing operations of $0.47vs. $0.37last year
►Generated $22Min cash flow from operations
►Completed $250Mprivate placement of convertible notes in February 2008
►$353Min total available cash and credit lines at 2/29/08

Quarterly Earnings Summary: (EPS)

Sorry, but I can not get charts to format properly without having to add hard returns to the whole post, so this chart will be added as a reply to the post.

Annual Revenue, YoY, through 3rd Quarter (in millions):

08 $1061
07 $886
06 $740
04 $600

From the above, earnings per share have grown at a rate of 28% the previous year (4th-3rd quarter). Revenue grew at 19.75% for the same period.

AIR’s price is currently at $18.95, down nearly 52% since Dec. 27th.
The trailing P/E as of Friday, 5/23 was 11.35

Using trailing numbers PEG is about .41 (Yahoo uses future predictions. I prefer to figure PEG based on the previous years earnings and that growth compared to the prior year. It is a backward-looking number, but at least it is based on something besides analysts predictions)


Part of AIR’s business is the purchase and leasing of aircraft, typically mid-sized and mid-life units. In the first quarter of this fiscal year, AIR almost doubled its fleet through the purchase and lease-back of 18 aircraft from Malasia Airlines. From the 07 annual report:

Penerbangan Malaysia Berhad (PMB) —
a subsidiary of the Malaysian government
and parent company of Malaysian Airlines
(MAS) — tendered for sale 18 Boeing 737-
400 aircraft in two lots of nine on April 30,
2007. On May 1, AAR was at PMB’s offices
in Malaysia with an offer to purchase all 18.
We completed the PMB transaction and
leased the aircraft back to MAS in a matter
of weeks. › The opportunity fit perfectly
with key AAR strengths — specialized
expertise in midlife, midsize aircraft,
and extensive experience with airlines.

76% of AIR’s business is based in North America. With the North American Airline Industry projected to have slow growth in the near future, they hope to expand their presence outside the region. The transaction with Malaysian Airlines was a large move into Asia. Their fleet was at 37 at the start of the current quarter.

AIR carries a lot of debt. I believe some of this, if not all, is for the purchase of the aircraft. In general, it is a fairly capital-intensive business. I admit to being pretty unknowledgeable of debt types and their implications, so hopefully wiser minds will look at the financials of AIR and give input. While we generally prefer companies that operate with little or no debt, it seems that AIR is leveraging their debt for greater returns for the investors. Please correct me if this is not an accurate read on the situation.

Conclusion: AIR is currently selling at less than 1/2 of its high from just 5 months ago. Yet they have grown earnings and revenues significantly during the period, at least through their last reported quarter which ended Feb 29th. I noted in a post above that AIR came under FAA scrutiny due to their painting of certain surfaces on landing gear. Boeing has reported that they consider this method perfectly acceptable. Perhaps there will be earnings suprises due to this event when they make their next quarterly and annual report in July. Beyond this, though, AIR is looking like an excellent bargain and clear value play in a growth stock. I am seriously considering adding shares. This looks like an excellent buy to me at this time. I added shares this morning.

Cheers, Doug

Disclosure: long AIR



Link to 07 Annual Report:
http://media.corporate-ir.net/media_files/irol/11/...

Link to current Investor Presentation:
http://media.corporate-ir.net/media_files/IROL/11/...
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