AAR Corp Stock: Record Year, Adjusted EPS +32% — But We Say HOLD (AIR Q4 FY2026)

AAR Corp (AIR) Q4 FY2026 — AAR Corp (AIR), a leading aviation aftermarket services company, reported a RECORD Q4 FY2026 (quarter ended May 31): net sales rose 23% to $928M (13% organic), adjusted diluted EPS jumped 32% to $1.53 (GAAP EPS $1.27), and adjusted EBITDA rose 27% to $116M (12.5% margin, up from 12.4%). Full-year FY2026 sales crossed $3.3B (+19%), with GAAP diluted EPS of $4.86 and net income of $187.7M (vs $12.5M / $0.35 in FY25, which carried $115M of Landing Gear / FCPA charges). Parts Supply grew 39% (new-parts distribution +19% organic) and Repair, Engineering & Software 35%. Yet the honest catch is CASH: full-year operating cash flow was just $98.7M — only 24% of adjusted EBITDA — and free cash flow only ~$62M, a fraction of net income, as inventory swelled to $979M (+~$170M) to fund distribution growth; net interest ran ~$70M (~25% of operating income), and the diluted share count is up ~11% after a Q2 equity raise (net leverage did improve to 2.03x from 2.72x). The stock (~$141) has nearly doubled off its $71 52-week low to a fresh high near $147 — and trades ABOVE Wall Street's ~$136 average target, with KeyBanc already downgrading on valuation. On EV/EBITDA (~17x) AAR looks cheap vs HEICO (~36x) and TransDigm (~20x), but on P/FCF (~110x) it's dearer than both. Our triangulated fair value is ~$90. Our call: HOLD, 3/5. AAR Corp (AIR) is a leading global aviation aftermarket services company — the business of keeping aircraft flying long after the OEMs deliver them: distributing new and used serviceable parts (Parts Supply), running airframe and component MRO plus the Trax software platform (Repair, Engineering & Software), and supporting U.S. government fleets (Government Solutions). Fiscal Q4 2026 (ended May 31) was a genuinely strong, record quarter: net sales +23% to $928M — 13% of it ORGANIC — adjusted diluted EPS +32% to $1.53 (GAAP $1.27), and adjusted EBITDA +27% to $116M at a 12.5% margin. Full-year sales topped $3.3B (+19%), GAAP EPS was $4.86, and net income swung to $187.7M. Parts Supply grew 39% on new-parts distribution share gains (+19% organic) and RE&S 35%; management guided Q1 FY27 sales growth of 21–23% (ex the Legacy Commercial Programs unit it is winding down) and touts a 37% five-year adjusted-EBITDA CAGR with ~100 bps/yr of margin expansion. So why only a HOLD? Because the profit isn't turning into CASH. Full-year operating cash flow was just $98.7M — only 24% of adjusted EBITDA — and free cash flow only ~$62M, a fraction of net income, as inventory ballooned to $979M to fund distribution growth. Net interest ran ~$70M (~25% of operating income), the diluted share count is up ~11% after a Q2 equity raise, and net debt is $816M (leverage did fall to 2.03x). Valuation is the other half: the stock has nearly doubled off its $71 low to ~$141 — above Wall Street's ~$136 average target, and KeyBanc has already downgraded on valuation. AAR looks cheap at ~17x EV/EBITDA vs HEICO (~36x) and TransDigm (~20x), but it's a lower-margin (~8% net) distributor, and on free cash flow it trades near ~110x — DEARER than either premium peer. Anchoring valuation on owner earnings (FCF) rather than accounting profit, our two-path DCF spans ~$37–64 (cash stays thin) and ~$80–133 (cash converges), blending — with an 11–13x EV/EBITDA cross-check — to a triangulated fair value of ~$90, well below the $141 price. Our verdict: HOLD, 3/5. A genuinely transformed, record-year business we admire — but with thin free cash flow and a premium multiple after a near-double, there is no margin of safety, and we are more cautious than the Street's Buy. Watch cash conversion above all else. Not financial advice. THE CALL: HOLD (3/5, A TRANSFORMED, RECORD-YEAR AFTERMARKET BUSINESS — BUT THIN FREE CASH FLOW (~$62M vs $188M NET INCOME) AND A PREMIUM ~17x EBITDA MULTIPLE AFTER A NEAR-DOUBLE LEAVE NO MARGIN OF SAFETY) — base-case value ~$90 vs ~$141 today. What to watch: Watch FREE CASH FLOW CONVERSION above all else — the single biggest swing factor. AAR converted only ~24% of adjusted EBITDA to operating cash flow and ~$62M to free cash flow this year, versus $187.7M of net income, because growth is funded by working-capital (inventory rose to $979M) plus ~$70M of annual interest. We'd turn more constructive on hard evidence that cash is catching up to profit — operating-cash-flow conversion climbing toward normal as working capital moderates and margins expand — and/or a pullback toward our ~$90 fair value (the stock trades ~36% above it, and above the Street's ~$136 target, after nearly doubling off its $71 low). The risk to respect is the opposite: FCF stays thin while growth slows, or the re-rated ~17x EV/EBITDA multiple de-rates back toward AAR's own ~8–10x history — a long way down. Also monitor margin expansion / the Legacy Commercial Programs wind-down, HAECO Americas + ADI integration synergies, deleveraging below 2.0x, and government/defense budget exposure (~14% of sales). Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.