Shares of AAR Corp (NYSE: AIR) fell as much as 18% today after the company lowered their 2010 fourth quarter earning guidance to $0.25-0.30 per share . Here is the press release they issued:

AAR CORP. (NYSE: AIR), today commented that results for the fourth quarter ending May 31, 2010, will be below its expectations due to a slower than expected recovery in demand for commercial aviation after-market support. The Company expected additional strength in its commercial parts supply businesses during the quarter to more than offset an expected decline in volumes and margins at its mobility products business.

Fourth quarter results will also be negatively impacted by $0.02 per share, compared to third quarter, due to one-time transaction costs associated with a business acquisition. Including the above, the Company expects fourth quarter sales to be $355 to $365 million and diluted earnings per share of $0.25 to $0.30. This compares to third quarter sales of $310 million and fully diluted earnings per share of $0.26. The Company is forecasting stronger cash flow from operations for the fourth quarter compared to the third quarter.

“While we have seen signs of recovery in some of our businesses that support commercial aviation, we expected a more meaningful pick-up in our parts business which has not yet materialized,” said David P. Storch, Chairman and Chief Executive Officer of AAR CORP. “Although the pace of recovery in our commercial markets is less robust than we expected, I am very pleased that we continue to generate cash significantly greater than our earnings.”

Storch continued, “I remain encouraged with the prospects for our commercial aviation business, while our defense and government services businesses continue to perform well and meet our expectations. I am also pleased with the early performance and integration efforts surrounding our new acquisition, Aviation Worldwide Services. Based on the business activity in front of us and our continued strong cash flow performance, we will enter our new fiscal year expecting double-digit year-over-year diluted earnings per share growth.”

The news is not all that bad. Revenue and EPS is still  increasing compared to the third quarter and the company is generating cash. Generating higher cash flow from operation compared to earning is always a good signal. For 2011, the expected EPS is $1.82 which makes the forward PE around 10. We started buying AIR last year and our average price is $14.20. Currently it makes around 6% of our portfolio (after it dropped almost 30% from it’s peak).