Executive Summary / Key Takeaways

• Aerospace Products segment achieved 105% operating income growth with margin expansion from 13% to 25%, driven by cost efficiencies, strategic divestments, and a pivot toward higher-margin special mission electronics, signaling a fundamental earnings power shift.
• Professional Services faces regional economic pressure from reduced cattle processing wages and drought conditions in southwest Kansas, yet sports wagering revenue grew 28% as the company leverages exclusive DraftKings (DKNG) partnerships to offset traditional gaming declines.
• Management is aggressively returning capital through a $15 million stock repurchase program while maintaining moderate leverage (debt-to-equity 0.58) and investing $12.5 million in fiscal 2026 for STCs, equipment, and facility expansion.
• The stock trades at 10.73x earnings and 6.35x EBITDA, a discount to aerospace peers, with sum-of-parts valuation suggesting potential upside as aerospace improvements remain masked by gaming cyclicality.
• Key risks include geographic concentration in Kansas gaming, persistent aerospace supply chain vulnerabilities, and execution challenges in scaling the sports wagering network while managing a 2% revenue share increase to the state.

Setting the Scene: A Dual-Engine Business at an Inflection Point

Butler National Corporation, incorporated in 1960 and headquartered in Kansas, operates a unique dual-segment structure that has evolved through deliberate strategic transformation. The company designs, engineers, and manufactures aerospace components while simultaneously managing the Boot Hill Casino and Resort in Dodge City, Kansas. This combination creates a complex investment narrative where aerospace margin expansion and gaming cash generation intersect, often obscuring the true earnings power of either segment.

The aerospace business serves private, commercial, business, and government aircraft operations, with particular strength in modifications for Learjets, Beechcraft, and Cessna platforms. The gaming segment, which contributed 44% of revenue in the most recent quarter, operates under a 15-year management contract extending through 2039, providing long-term visibility but exposing the company to regional economic cycles. This structure emerged from a series of strategic moves: the 2022 buyout of the 40% casino partner stake, the 2022 launch of Kansas sports wagering, and the 2025 divestment of the low-margin autopilot product line.

Understanding Butler National requires recognizing that these segments operate in fundamentally different competitive environments. Aerospace competes against specialized MRO providers like AAR Corp. and HEICO , where technical certification and turnaround time drive value. Gaming competes for discretionary spending in a rural Kansas market where cattle processing wages and agricultural conditions directly impact patron behavior. The company's strategic challenge is maximizing aerospace profitability while stabilizing gaming cash flows long enough for sports wagering to mature.

Technology, Products, and Strategic Differentiation

Butler National's aerospace moat rests on three pillars: proprietary Supplemental Type Certificates (STCs), specialized fabrication capabilities, and deep expertise in legacy aircraft platforms. The company recently received FAA and EASA approvals for non-halon portable fire extinguisher replacements in Learjets, a critical differentiator as environmental regulations phase out legacy systems. This matters because STCs represent multi-year, million-dollar investments that create regulatory barriers to entry, allowing Butler National to command premium pricing while competitors must navigate the same lengthy certification process.

The April 2025 purchase of a building adjacent to its Newton airport campus expands internal fabrication capabilities, directly addressing a core cost driver. By bringing sub-component manufacturing in-house, the company reduced aerospace product costs by 12% year-over-year while improving operating margins by 12 percentage points. This vertical integration strategy counters supply chain disruptions that have plagued the electronics side of the business, where component shortages forced computer board redesigns. The "so what" is clear: Butler National transformed a supply chain vulnerability into an efficiency gain, reducing outsourcing costs and accelerating production timelines for special mission electronics.

The divestment of the autopilot product line exemplifies management's focus on margin over volume. Autopilot systems represent commoditized avionics with intense price competition from larger OEMs. Exiting this business eliminated low-margin revenue while freeing engineering resources for higher-value special mission electronics, where revenue grew 40% year-over-year. This strategic pruning demonstrates capital discipline rare among small-cap aerospace players, directly contributing to the 105% surge in aerospace operating income.

Financial Performance & Segment Dynamics: Aerospace Accelerates, Gaming Stabilizes

The three months ended July 31, 2025, reveal a tale of two segments. Aerospace Products revenue increased 7% to $11.31 million, but operating income surged 105% to $2.89 million, lifting margins from 13% to 25%. This margin expansion wasn't driven by volume alone; it resulted from strategic cost actions including reduced outsourcing, improved labor efficiency, and the autopilot divestment. The segment now contributes 56% of total revenue but generates 62% of operating income, making it the primary value driver.

Special mission electronics revenue jumped 40% to $4.24 million, fueled by production efficiencies and pre-building components to mitigate delays. This business benefits from increased European demand driven by Ukraine-related defense spending, positioning Butler National as a niche supplier in a growing market. Aircraft avionics revenue more than tripled to $1.44 million on a multi-airplane upgrade contract, demonstrating the company's ability to capture larger, more profitable projects. The $28.2 million backlog represents approximately 7.5 months of business at the current aerospace revenue pace, providing revenue visibility uncommon in small-cap aerospace.

Professional Services revenue declined 5% to $8.81 million, but the composition shift tells a more nuanced story. Traditional casino gaming revenue fell 8% to $6.48 million as reduced cattle processing wages and drought conditions pressured patron visits. However, sports wagering revenue grew 28% to $1.29 million, capturing an estimated 5-6% of dollars bet through exclusive DraftKings, Golden Nugget, and Bally's (BALY) partnerships. This matters because it demonstrates the segment's ability to pivot toward higher-growth, higher-margin revenue streams despite regional economic headwinds.

The 2% revenue share increase to the State of Kansas, effective December 2024, will pressure gaming margins but reflects the long-term value of the 15-year contract renewal. Management is offsetting this through operational efficiency and sports wagering expansion, with the right to establish up to 50 remote marketing locations, 20% reserved for fraternal organizations. This network effect could transform Butler National from a single-location operator into a statewide platform.

Outlook, Guidance, and Execution Risk

Management's guidance reveals confidence in aerospace momentum while acknowledging gaming challenges. The company expects to bill the majority of July 31, 2025, contract assets during fiscal 2026, suggesting strong near-term revenue recognition. Planned capital expenditures of $12.5 million in fiscal 2026—$5 million for STCs, $4.5 million for equipment, and $3 million for buildings—represent a strategic investment in growth capacity, particularly the fabrication expansion that drove recent margin gains.

Clark Stewart, CEO, stated in Q2 2023, "I'm positive on this year. I think we're going to have a very good year," a sentiment echoed in recent commentary about aerospace strength. The backlog's growth to $28.2 million, combined with new orders and cash deposits, positions the company for strong second and third quarter performance. However, management cautioned that inflationary pressures on material and labor costs may not be fully transferable to customers, potentially compressing future margins.

The sports wagering rollout remains in early innings. The temporary retail sportsbook opened in late 2022, with a permanent facility planned for late 2022 or early 2023. While the timeline appears delayed based on recent commentary, the 28% revenue growth in the most recent quarter suggests traction. The key execution risk is scaling the 50-location network while maintaining profitability under an increased state revenue share.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is geographic concentration. The Boot Hill Casino depends on a 100-mile radius market where cattle processing and meat packing wages drive discretionary spending. Reduced shifts, drought conditions, and inflation have already decreased visitor counts by 8-9% while spend per visitor rose 29%, indicating fewer patrons with higher value. If regional economic deterioration accelerates, gaming revenue could decline faster than sports wagering can offset, dragging overall company performance.

Aerospace supply chain vulnerabilities remain despite recent improvements. Component shortages forced computer board redesigns, and while management claims this ultimately improved the supply chain, future disruptions could delay special mission electronics production. The company's small scale relative to competitors like AAR Corp. and HEICO limits supplier bargaining power, making it more susceptible to input cost inflation that may not be recoverable through pricing.

Customer concentration poses a subtle but significant risk. The aerospace business relies on legacy aircraft operators, particularly Learjet, Beechcraft, and Cessna owners. As these fleets age and retire, demand for modifications could decline unless Butler National successfully expands into newer platforms. The company's limited R&D spending compared to larger competitors constrains its ability to develop next-generation capabilities, potentially leaving it behind as aviation technology evolves.

On the positive side, asymmetries exist in both segments. Aerospace margins could expand further if the fabrication facility drives additional cost savings or if defense spending increases due to geopolitical tensions. Gaming could surprise to the upside if the 50-location sports wagering network accelerates or if regional economic conditions improve. The company's low debt profile (debt-to-equity 0.58) and $2 million untapped credit line provide financial flexibility to weather downturns or pursue acquisitions.

Valuation Context: Discounted Complexity

Trading at $2.36 per share, Butler National carries a market capitalization of $153 million and enterprise value of $157 million. The stock trades at 10.73x trailing earnings, 6.35x EBITDA, and 5.08x operating cash flow—multiples that reflect a market skeptical of the company's dual-segment complexity. These valuations stand at significant discounts to aerospace peers: AAR Corp. (AAR) trades at 16.75x EBITDA despite 1% net margins, while HEICO (HEI) commands 38.94x EBITDA with 15% net margins. Butler National's 16.6% net margin and 23.19% operating margin suggest its earnings quality matches or exceeds larger competitors, yet its valuation does not reflect this.

The sum-of-parts valuation reveals potential upside. If the aerospace segment, with its 25% operating margins and $28.2 million backlog, were valued at even 8-10x EBITDA—a conservative multiple for specialized MRO providers—it would imply a value exceeding the current enterprise value before accounting for the gaming segment. The gaming segment, despite near-term headwinds, generates $1.78 million in quarterly operating income from a 15-year contracted asset with sports wagering optionality. This embedded value remains obscured by segment reporting that combines a high-margin aerospace business with a cyclical gaming operation.

Management's aggressive share repurchase program—expanded from $4 million to $15 million between July 2023 and June 2025—signals confidence that the market undervalues the company. The $3.7 million in buybacks during the most recent quarter, funded by $14.7 million in operating cash flow, demonstrates capital discipline while reducing share count and increasing per-share value. This matters because it shows management prioritizing shareholder returns over empire-building, a rarity among small-cap conglomerates.

Conclusion: A Transformation Masked by Cyclical Noise

Butler National's investment thesis hinges on recognizing that aerospace margin expansion and capital discipline are being masked by temporary gaming headwinds. The 105% increase in aerospace operating income, driven by strategic cost actions and a pivot to higher-margin special mission electronics, represents a fundamental improvement in earnings power that the market has yet to reward. While regional economic pressures weigh on gaming, the 28% growth in sports wagering and the 15-year contract renewal provide stability and optionality.

The company's valuation at 6.35x EBITDA and 10.73x earnings reflects investor skepticism of its dual-segment structure, yet this same structure provides diversification that pure-play aerospace or gaming companies lack. Management's focus on returning capital through buybacks while investing in growth initiatives like the fabrication facility suggests a balanced approach to value creation.

The critical variables that will determine whether this thesis plays out are aerospace margin sustainability and gaming stabilization. If the company can maintain aerospace margins above 20% while growing special mission electronics revenue, and if sports wagering can offset regional gaming declines, the valuation gap should close. Conversely, if supply chain disruptions return or regional economic conditions deteriorate further, the discount may persist. For investors willing to look through near-term gaming noise, Butler National offers exposure to a transformed aerospace business trading at a significant discount to intrinsic value.