AIR stock just hit an all-time high. The trailing P/E ratio is 110X. The net profit margin is 1%. That is not a typo. AAR Corp generated $2.9 billion in revenue last year. It kept roughly $29 million. For every $100 in sales, the company pockets one dollar. Yet the market prices AAR like a SaaS company. The reality is an aviation warehouse. To grow 20%, AAR must physically hold 20% more turbine blades and landing gear. Inventory grew $109 million last year. Receivables grew another $109 million. Free cash flow went negative. The question is not whether AAR is a real business. It is. The question is whether the market understands what kind of business it actually is.
The Valuation Gap: Priced for Perfection
Here is what the valuation actually reflects. AAR trades at 110X trailing earnings. The forward P/E drops to 17X because analysts expect adjusted earnings to normalize. But that normalization requires integration of multiple acquisitions to proceed without margin dilution. It requires tariffs on aerospace parts to stabilize. It requires government contract renewals in an environment where the Pentagon has proposed $50 billion in annual cuts. The gap between 110X trailing and 17X forward is not a discount. It is a bet that everything goes right.
The Margin Trap: Beta Priced Like Alpha
The margin structure tells the deeper story. AAR operates with 19% gross margins. Competitors with proprietary parts run at 40% to 55%. They manufacture. AAR distributes and services components it does not own. That is a beta play on flight hours being priced like an alpha play on proprietary technology. When tariffs add 10% to 25% costs on imported aerospace parts, AAR absorbs the compression. When labor costs rise, AAR absorbs that too. Skilled aviation mechanics are in global shortage. If AAR squeezes margins by capping labor, it risks losing the technicians who make the contracts possible.
Working Capital Trap: The Hidden Cash Drain
This is where the working capital trap emerges. AAR is not software. It cannot scale without physically warehousing more inventory. Net debt stands at $884 million. Net leverage is 2.49X EBITDA. Recent acquisitions added capacity but also added integration risk. Management expects 12 to 18 months before acquired margins reach AAR levels. And there is another hidden risk. The 32% parts distribution growth came during a scarcity cycle. New aircraft delivery delays forced airlines to harvest used serviceable materials from retired planes. If deliveries normalize, the premium on AAR's inventory could evaporate.
The tailwinds are real. AAR is the largest independent MRO in North America. Airlines are flying older aircraft longer. The $110 billion aftermarket is growing. But the stock hit all-time highs on negative free cash flow. Cash flow is the receipt. Everything else is the promise. AAR is writing checks faster than it collects them. That math works until it does not. The investors who thrive are the ones who read the receipt before they trust the promise.