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Are TransDigm Group Earnings Ready for Takeoff?

By Dan Caplinger – Jul 21, 2016 at 10:08AM

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The component maker has a long history of benefiting from the aerospace boom. Will it continue?

Many systems and components go into an airplane, including those that TransDigm builds. Image source: Getty Images.

The aerospace industry has never been stronger, and it isn't just aircraft manufacturers that are raking in the cash as a result. TransDigm Group (TDG -0.80%) makes components that are used in the aerospace industry, and whenever aircraft sales rise, demand for the products it makes goes up as well. The stock has climbed to new all-time highs, and coming into its fiscal third-quarter financial report early next month, TransDigm investors fully expect the company to keep up its momentum and deliver strong growth. Let's take an early look at what TransDigm Group has been up to and whether it can continue to produce the solid results that have benefited shareholders so much over the years.

Stats on TransDigm Group

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Data source: Yahoo! Finance.

Will TransDigm earnings soar?

In recent months, investors have become more optimistic about the near-term prospects for TransDigm Group earnings. They've raised their fiscal third-quarter projections by nearly a dime per share, and they've boosted their full-year fiscal 2016 and 2017 estimates by 4% and 7%, respectively. The stock has also kept climbing, posting a 22% rise just since mid-April.

TransDigm's fiscal second-quarter report was a prime catalyst to send the stock higher. Bouncing back from a rare weak quarter, TransDigm posted a 29% gain in sales that translated to a rise of more than a third in adjusted net income. Most of the growth came from acquisitions, but organic sales gains also contributed about 4 percentage points to its top line. CEO Nicholas Howley pointed to the success of the aftermarket for commercial aerospace components as a key element of TransDigm's recovery, as well as strength from the defense industry. The company also boosted its guidance for the remainder of the fiscal year, noting that strong margin figures would produce higher profits.

TransDigm makes a big buy

Yet TransDigm didn't simply sit on its gains. Instead, it kept executing on its long-term strategy, announcing in late May that it would purchase the parent of databus and power-supply product manufacturer Data Device Corporation for $1 billion. Data Device supplies its products to the global military and commercial aerospace markets, finding their way into military avionics and aircraft and space applications. Howley believes that the deal meets TransDigm's tests for a smart acquisition, in part because "the vast majority of DDC's revenue comes from highly engineered proprietary products with substantial aftermarket content." The deal closed in June, and investors are hopeful that Data Device will add to growth in the near future.

Investors should be prepared for further buys in the future. In June, the company announced that it had sought funding from the capital markets, including a private offering of $950 million in 10-year subordinated notes and an additional seven-year term loan of $500 million. Commitments toward a delayed-draw loan of $450 million and other steps could add the potential for more available capital down the road. TransDigm said it would use part of the proceeds toward the Data Device acquisition, but the remainder would be available for other purposes including potential future acquisitions or dividend payments to shareholders.

TransDigm shares also got a boost from the forced purchase of shares by index-fund investors. The company's stock was added to the S&P 500 index in late May, taking the place of Baxalta after it was acquired. The impact of being added to a major index doesn't always last, but the stock did climb almost 3% when the addition became effective.

In the TransDigm Group earnings report, investors should track whether the company builds on its momentum from earlier in the year. Any signs of cracks in the aerospace market could pose a problem for the stock, but given the strength of the industry generally, TransDigm will likely have the wind at its back for the foreseeable future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

TransDigm Group Stock Quote
TransDigm Group
$616.85 (-0.80%) $-4.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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