I recently took a look at the 4th quarter and fiscal year 2007 results for AAR Corporation (AIR):http://boards.fool.com/Message.asp?mid=25678582As is usually the case, the company did slightly better than analysts’ expectations. The quarter saw 22% growth in revenue and 31% growth in diluted EPS from continuing operations. Unfortunately, the press release did not contain a cash flow statement. The 2007 form 10K has now been filed thus making possible a closer look at various aspects of valuation.The share price currently stands at 30.30, having dropped 11% since earnings were released. The company sports a market cap of 1.14B and an enterprise value of 1.38B. With 2007 revenue of 1.06B, we have an enterprise value to sales ratio of 1.3. With 2007 diluted EPS (from continuing operations) of 1.42, the company is trading at a PE of 21. Analysts estimate per annum growth of 20% over the next five years giving us a PEG just over 1.Owner earnings, defined as net income from continuing operations plus depreciation and amortization minus capital expenditures, stands at 61.8M. To get a more accurate picture of the company’s cash generation potential, one might recompute this figure by subtracting only that portion of capex related to the maintenance of the business. However, in order to keep the valuation on the conservative side, I have subtracted total capex. Using this figure, we compute an enterprise value to owner earnings ratio of 22.A DCF calculation based on 20% growth over the next five years, 3% terminal growth, and a discount rate of 11% yields a fair value of 35.07. The stock is currently trading at a 14% discount to this fair value. Reverse engineering a DCF calculation shows that the current price reflects an assumption of 17% growth.Robert
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