TransDigm Group (NYSE:TDG) has long been among the top performers among aerospace and defense stocks, up more than 1,200% over the past decade. But the company entered its fiscal 2019 last fall with an unusual amount of uncertainty due to an ongoing government investigation and a large acquisition.

TransDigm's fiscal fourth-quarter results, announced Nov. 19, should go a long way toward putting those doubts to rest. The company easily surpassed analyst expectations and said the integration of its $4 billion Esterline Technologies deal is proceeding ahead of schedule.

TDG Chart

TDG vs. S&P 500 data by YCharts.

Investors have taken notice, sending shares of TransDigm up more than 60% year to date. But even after that impressive gain, there is still time to climb on board. Here's why TransDigm's momentum shows no sign of slowing.

A well-oiled machine

TransDigm earned $5.62 per share in its fiscal fourth quarter, easily beating a consensus $5.31-per-share estimate that had risen by $0.15 in the last month after the company guided for better-than-expected profitability. Net sales in the quarter rose 46.9% year over year to $1.54 billion, including the added Esterline revenue, and were up 8% organically.

For the full fiscal year, organic sales grew by 10.5%, an increase over fiscal 2018's 5.5% organic growth. TransDigm has long attracted investor attention for its software-like margins and continued to deliver in the recent quarter, reporting an adjusted EBITDA margin of 45.9%.

A commercial airplane takes off from a runway.

Image source: Getty Images.

TransDigm took some criticism for buying Esterline because the target had a reputation as an underperformer, but the buyer has made quick work transforming the portfolio. The company has sold off many of the slower-performing units, recouping about 25% of the purchase price, while holding on to the business lines that show the most promise.

Executive chairman Nick Howley, the architect of TransDigm's impressive growth over the years, on a post-earnings call with investors said the integration has "moved faster than we expected."

Expect a deal or a payout

TransDigm's operating model is similar to that of a private equity firm, focused on buying businesses and extracting better results via improved management, cost cuts, and the benefits of scale. The company has done more than 60 deals since its formation in 1992 and remains on the prowl today.

Management on the call said that absent additional acquisitions or capital market transactions, and assuming announced divestitures close as expected, TransDigm will have roughly $5 billion in cash on hand by the end of fiscal 2020. Howley said that with the Esterline integration proceeding well, the company has the bandwidth to do more deals, and that the bigger challenge right now is finding businesses with attractive valuations.

Absent another deal, investors should expect TransDigm to return cash to shareholders via a special dividend sometime before the end of its fiscal 2020. The company does not pay a quarterly dividend but has a history of returning cash via a year-end payout, including declaring a $30-per-share dividend in August.

"We won't sit on that," Howley said, referring to the company's expected cash pile. "I mean ... either we will have something significant in the gunsight, or we'll do something else" like a return to shareholders.

Don't worry about the Pentagon

TransDigm's eye-watering margins have attracted the attention of lawmakers, with Congress in June directing the Pentagon's inspector general to launch a detailed probe into the contractor's pricing strategies. That sort of scrutiny, and a bruising Capitol Hill hearing, make for poor headlines, but so far the impact on the business seems minimal.

CEO Kevin Stein on the call said that a Pentagon pricing directive put out earlier this year aimed at TransDigm has slowed the order process in some cases, "but we don't see any noticeable impact on the business."

Aerial view of the Pentagon.

TransDigm can manage through its issues with the Pentagon. Image source: Getty Images.

Past Pentagon audits have tended to take upward of two years to complete, so this investigation appears to be a risk hovering around TransDigm for some time to come. But investors should remember that TransDigm has said in the past that direct sales to the Department of Defense account for less than 10% of total revenue, and a good chunk of that total is not sole-source contracts but rather priced in competition with other potential vendors.

TransDigm's margins are generated largely from commercial business with airlines that are willing to pay a premium for hard-to-find replacement parts or specialized manufacturing skills. Regardless of what the Pentagon concludes, there is no reason to believe TransDigm's profitability will come under threat.

TransDigm is an aerospace best buy

TransDigm expects the growth to continue in fiscal 2020. The company said it expects fiscal 2020 revenue of $6.175 billion to $6.325 billion, up 18% to 21% over full year 2019's $5.223 billion, and earnings per share of between $16.30 and $17.70, compared to the $12.94 per share for fiscal 2019. And that is assuming no additional acquisitions or divestitures.

Analysts were actually expecting slightly better results in 2020, and the case can be made that TransDigm is being conservative in its outlook. The company on the call mentioned risks including global trade dynamics, political risks, and a continued grounding of Boeing's 737 MAX as potential headwinds, predicting commercial sales on new aircraft to be up only low to mid single digits in 2020 despite Boeing's pledge to get the 737 MAX airborne by early next year and the multiyear new plane order backlogs at both Boeing and Airbus.

TransDigm has a history of underpromising and overdelivering, and I expect that 20%-plus growth forecast to be raised as the new fiscal year goes on. TransDigm has long been an outperformer and shows no sign of slowing down.