StandardAero, Inc. (SARO)

Executive Summary / Key Takeaways

• The Independent MRO Moat: StandardAero has carved out a defensible niche as one of the only independent providers adding meaningful overhaul capacity for next-generation engines, positioning it to capture share from capacity-constrained OEMs and generate $1 billion in annual LEAP revenue by 2029-2030.

• Margin Inflection Point: While Q3 2025 Engine Services margins of 12.5% appear compressed, this reflects deliberate investment in LEAP and CFM56 program ramp-ups that management expects to turn profitable in early 2026, while eliminating $300-400 million of low-margin pass-through revenue will structurally boost reported margins and free cash flow conversion.

• Capital Efficiency Transformation: The October 2024 debt refinancing will save over $130 million annually in interest, while contract renegotiations will unlock working capital tied up in material pass-through arrangements, driving free cash flow guidance to $170-190 million despite heavy growth investments.

• Competitive Positioning Strength: As the exclusive independent heavy overhaul provider for the HTF-7000 platform and the first non-OEM authorized for source-controlled LEAP fan blade repairs, StandardAero has built technical barriers that take years and hundreds of millions in capex to replicate.

• Execution Risk Remains: The thesis depends on flawless execution of multiple simultaneous capacity expansions (San Antonio LEAP, DFW CFM56, Winnipeg CF34) while managing supply chain constraints and remedying material weaknesses in internal controls identified in recent filings.

Setting the Scene: The MRO Industry's Structural Shift

StandardAero, with roots tracing back to 1911 but reconstituted as a public entity in October 2024, operates at the center of a perfect storm in aerospace aftermarket services. The company generates over 90% of its revenue from Engine Services, providing maintenance, repair, and overhaul (MRO) for gas turbine engines and APUs across commercial, business, and military aviation. This isn't a generic service business—it's a highly engineered operation where FAA/EASA certifications, proprietary repair processes, and decades of technical data create moats that few competitors can cross.

The industry structure has fundamentally shifted in StandardAero's favor. OEMs like GE (GE) and Safran (SAFRY) face capacity constraints as they prioritize new engine production over MRO work, creating a supply-demand imbalance that management describes as "tight globally" and expected to continue "for the foreseeable future." This dynamic transforms StandardAero from a mere alternative into a strategic necessity for airlines facing extended turnaround times. The company's place in the value chain is further strengthened by its Component Repair Services (CRS) segment, which provides high-margin component repairs and creates a virtuous cycle of in-sourcing opportunities from the Engine Services business.

Technology, Products, and Strategic Differentiation

StandardAero's competitive advantage rests on three pillars that competitors cannot easily replicate. First, the company is the exclusive independent heavy overhaul provider for the HTF-7000 engine platform, which powers mid- and super mid-size business jets experiencing strong demand. This exclusivity isn't a marketing claim—it's a technical designation that requires specific tooling, data rights, and engineering expertise that OEMs have granted to only one independent provider.

Second, StandardAero has industrialized over 450 OEM-authorized LEAP repairs, making it the first non-OEM provider of source-controlled LEAP-1A and 1B fan blade repairs, including structural edge and coating repairs. This matters because LEAP engines represent the fastest-growing installed base in commercial aviation, with shop visits accelerating as early production engines mature. Management's confidence that LEAP revenues alone will reach $1 billion annually by 2029-2030 isn't aspirational—it's based on nearly 50 engines inducted through Q3 2025, over 60 expected by year-end, and bookings exceeding $1.5 billion, up from $1 billion at the end of 2024.

Third, the company is one of the only independent MRO businesses adding meaningful overhaul capacity for the CFM56 platform, which maintains the largest installed base in commercial aviation history. While competitors are capacity-constrained, StandardAero's DFW facility expansion secured a significant three-year award from a major North American carrier and inducted its first performance restoration shop visit in Q2 2025. This capacity addition creates a first-mover advantage as airlines seek long-term MRO partners.

Financial Performance & Segment Dynamics

Engine Services: The Growth Engine

The Engine Services segment delivered $1.32 billion in Q3 2025 revenue, up 21.3% year-over-year, driven by a near-doubling of LEAP revenues sequentially and strong contributions from CF34, CFM56, and turboprop platforms. Business aviation revenue grew 28% on HTF-7000 strength, while military and helicopter revenue rose 21% as AE1107 volumes recovered from the 2024 V-22 grounding.

The 12.5% adjusted EBITDA margin appears to compress from 13.5% in Q3 2024, but this is deceptive. Excluding a one-time $9.3 million liability extinguishment gain in the prior year, margins actually improved significantly. More importantly, the margin headwind reflects deliberate investment in LEAP and CFM56 program ramps that are navigating the learning curve. Management explicitly states both programs will become margin-positive in early 2026, suggesting current margins represent a trough, not a ceiling.

Full-year 2025 guidance implies Engine Services revenue of $5.27-5.31 billion at 13.2% EBITDA margins, with the midpoint representing 14% growth. This acceleration comes despite supply chain constraints that have limited engine throughput, indicating pricing power and market share gains.

Component Repair Services: The Margin Amplifier

The CRS segment is a hidden gem, generating $175.8 million in Q3 2025 revenue (13.9% growth) with a record 30.7% adjusted EBITDA margin, up 430 basis points year-over-year. This margin expansion reflects volume leverage, favorable mix, and the Aero Turbine acquisition's integration. The segment's role extends beyond its direct financial contribution—it provides repair development capabilities that strengthen the Engine Services value proposition and increase in-sourcing, with activity up nearly 40% year-over-year in Q2 2025.

The August 2024 Aero Turbine acquisition for $130.7 million demonstrates StandardAero's M&A discipline, adding military component repair capabilities while delivering immediate margin accretion. With over 20,000 licensed component repairs and new OEM authorizations on critical CF34-8 fan blade repairs, the CRS segment creates a reinforcing cycle: more repair capabilities attract more engine MRO business, which generates more component repair volume.

Capital Structure and Cash Flow Transformation

StandardAero's October 2024 debt refinancing was transformational, reducing the weighted average interest rate from 9% to 6.8% and generating over $130 million in annual interest savings starting in 2025. The company's $722.8 million in available liquidity as of September 30, 2025, provides ample firepower for growth investments while maintaining a conservative 2-3x net leverage target.

The most underappreciated financial catalyst is the planned elimination of $300-400 million in material pass-through revenue in 2026. While this will nominally reduce top-line growth, management emphasizes it will have "minimal impact on EBITDA or earnings growth" while improving working capital efficiency and free cash flow conversion. This structural change better reflects true operating performance and will likely lead to multiple expansion as investors recognize the higher-quality revenue stream.

Outlook, Management Guidance, and Execution Risk

Management's repeated guidance raises throughout 2025 reflect not just strong demand but improving operational execution. The latest guidance calls for total company revenue of $5.97-6.03 billion (14.5% growth at midpoint) and adjusted EBITDA of $795-815 million, representing 16.5% growth. This 350 basis point improvement in EBITDA growth versus initial expectations demonstrates the company's ability to absorb tariff impacts and supply chain headwinds while expanding margins.

The Q4 2025 free cash flow guidance of $170-190 million is particularly significant, representing a sharp inflection from the -$6.3 million used in operating activities during the first nine months of 2025. Management's confidence stems from "line of sight" on constrained parts (forgings and castings) that will enable shipment of completed engines, unwinding working capital build. This pattern—heavy working capital investment during growth phases followed by cash conversion as programs mature—characterizes successful industrial growth stories.

The LEAP program's trajectory validates the long-term thesis. With planned 2026 slots "rapidly filling up" and the San Antonio facility completing test cell correlations for both LEAP 1A and 1B engines in Q4 2024, StandardAero has cleared the technical hurdles. The $1.5 billion booking backlog provides multi-year visibility, while the company's status as the only non-OEM with source-controlled fan blade repairs creates pricing power.

Risks and Asymmetries

The primary execution risk lies in the simultaneous ramp of multiple major programs. The LEAP industrialization, CFM56 DFW expansion, CF34 Winnipeg expansion, and Augusta business aviation facility expansion all require capital, talent, and management attention. Any significant delay or quality issue in one program could cascade through the organization, particularly given supply chain constraints that have already impacted engine throughput.

Customer concentration remains a material risk, with the top 10 customers representing a meaningful share of revenue. The loss of a major airline customer or a shift in military spending could create revenue volatility that the company's fixed-cost base would struggle to absorb. The Aero Turbine acquisition, while strategically sound, increases exposure to military budget cycles and government procurement processes.

Material weaknesses in internal control over financial reporting, while being remediated, represent a governance risk that could lead to restatements or delayed filings. Management's mitigation efforts—including hiring additional personnel, engaging external consultants, and implementing IT general controls—are progressing, but the weaknesses cannot be considered remediated until controls operate effectively for a sufficient period.

On the positive side, the supply chain disruptions that have constrained the industry also create an asymmetry: StandardAero's investments in capacity and repair development position it to capture outsized share as constraints ease. The company's ability to industrialize 260 LEAP component repairs within CRS creates a secondary revenue stream that competitors cannot quickly replicate, particularly given the FAA approval process.

Valuation Context

Trading at $26.56 per share with a market cap of $8.88 billion, StandardAero trades at 16.5x EV/EBITDA based on 2025 guidance midpoint and 1.93x EV/Revenue. These multiples appear reasonable for a business growing EBITDA at 16.5% with a clear path to margin expansion and $130 million in annual interest savings.

The P/E ratio of 47.43 reflects the company's transition period, where heavy growth investments and one-time costs mask underlying earnings power. More relevant is the price-to-operating cash flow ratio of 87.06, which should compress dramatically as working capital unwinds in Q4 2025 and beyond. The company's 9.85% return on equity and 4.88% return on assets are set to improve as new programs reach maturity and interest expense declines.

Relative to peers, StandardAero's valuation appears attractive. HEICO (HEI) trades at 39.4x EV/EBITDA with slower growth, while TransDigm (TDG) commands 22.6x EV/EBITDA despite lower revenue growth. AAR Corp (AIR) trades at 16.8x EV/EBITDA but lacks StandardAero's exposure to next-generation engine platforms. The valuation gap reflects StandardAero's recent public listing and the market's incomplete understanding of its competitive moats.

Conclusion

StandardAero represents a rare combination of cyclical tailwinds, structural market share gains, and operational leverage that should drive outsized returns over the next decade. The company's positioning as the independent MRO provider of choice for capacity-constrained OEMs creates a durable competitive advantage, while the LEAP program's path to $1 billion in annual revenue provides a visible growth driver that few industrial companies can match.

The key investment thesis hinges on two factors: successful execution of the multi-program ramp in 2026 and realization of the promised margin expansion as LEAP and CFM56 programs mature. If management delivers on its guidance for these programs to become margin-positive in early 2026 while eliminating low-quality pass-through revenue, investors should see both earnings growth and multiple expansion.

The stock's current valuation embeds modest expectations, leaving room for significant upside as the market recognizes the quality of StandardAero's revenue streams and the depth of its competitive moats. For investors willing to look beyond near-term margin compression and supply chain noise, StandardAero offers a compelling story of a century-old business reinvented for the next generation of aerospace growth.