AAR currently trades at $79.22 and has been a dream stock for shareholders. It’s returned 294% since August 2020, more than tripling the S&P 500’s 91.5% gain. The company has also beaten the index over the past six months as its stock price is up 22.2% thanks to its solid quarterly results.
Is now the time to buy AAR, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is AAR Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in AAR. Here are three reasons why you should be careful with AIR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, AAR’s 6.1% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, AAR’s margin dropped by 5.6 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. AAR’s free cash flow margin for the trailing 12 months was breakeven.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
AAR historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
AAR’s business quality ultimately falls short of our standards. With its shares outperforming the market lately, the stock trades at 17.4× forward P/E (or $79.22 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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