What happened

Shares of TransDigm Group (NYSE:TDG) gained 10.9% in August, according to data provided by S&P Global Market Intelligence, on the strength of the aerospace component manufacturer's quarterly results. There has been a lot of noise surrounding this longtime highflier, but the blowout performance in the quarter provided a fresh reminder about how strong the underlying business continues to be.

So what

TransDigm reported fiscal third-quarter earnings of $4.95 per share, easily beating Wall Street's $4.30 consensus, fueled by organic sales growth of 11.8%. It's the third consecutive quarter of double-digit organic revenue growth. Defense and commercial original equipment sales led the way with double-digit gains, and aftermarket (sales of replacement parts to airplane operators) was up 8%.

Two planes flying against a blue background.

Image source: Getty Images.

The company is a manufacturer with a reputation for software-like margins, and it didn't disappoint. Gross margin, which fell 1,200 basis points year over year due to acquisition-related expenses, still came in at 45.9%. TransDigm's free cash flow of $278 million was higher than recorded net income, an indication of the cash generation power of the core business.

TransDigm also raised its full-year revenue and EBITDA guidance and announced a special dividend of $30 per share.

With the shares up more than 200% over the past five years, the company has long been an outperformer. Still, TransDigm had something to prove in the most recent quarter. It's been a target of criticism in Washington over its billing practices, and while it has been a serial acquirer, there had been some concerns that its $4 billion purchase of Esterline Technologies, which was larger than TransDigm's typical deal, could be an integration headache.

Now what

TransDigm through the years has earned a reputation as a private equity-type operator of aerospace businesses, generating outsize returns by following a playbook of maximizing efficiencies and using pricing power to drive up margins. The real issue lingering over the stock has been whether the model was sustainable as TransDigm grew larger and pursued more complex acquisition targets, especially with additional congressional scrutiny hanging over the business.

All of those concerns remain valid, but the results announced in August went a long way toward making the case that the model still works and that TransDigm will remain a top aerospace stock for the foreseeable future.

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