What happened
Shares of aerospace component maker TransDigm (TDG +4.30%) slumped 13.3% in February, according to data from S&P Global Market Intelligence. Since the growth stock -- one of the best-performing industrial stocks in 2019 -- was actually up nearly 13% on a year to the day after it reported earnings in early February, it's fair to say that the fall in the share price through February is largely a consequence of fears around the COVID-19 outbreak.
TransDigm needs passenger growth in order to drive demand for aerospace aftermarket parts. Image source: Getty Images.
TransDigm is primarily an aftermarket part manufacturer, and as such, its end market prospects are tied to the amount of revenue passenger kilometers (RPK) airlines generate. The more kilometers airplanes racked up, the more they will need servicing and aftermarket provisioning. Therefore, it's clear that the coronavirus outbreak is going to have a significant impact on the company because of a decline in airline passenger traffic.
So what
The bullish case sees it that COVID-19 will follow a SARS-like trajectory and ultimately disappear as a headline item, but even in this scenario there will still be a significant near-term hit. For example, the International Air Transport Association has modeled the impact on RPKs in 2020 assuming a "SARS-shaped" scenario, and the result is that it now expects global RPK to decline by 0.6%, compared with a previous forecast for growth of 4.1%. Moreover, that's an estimate that is arguably a best-case scenario as there is no guarantee that COVID-19 will follow the same path as SARS.
In this context, it's hard to see that the commercial aerospace aftermarket will see slowing growth in 2020, and that's likely to challenge the current earnings assumptions around stocks like TransDigm.
Now what
If you're the type of investor concerned with near-term risk, then TransDigm, and whole swaths of the marketplace, probably aren't for you right now. On the other hand, if you take the glass-half-full approach to matters, then the commercial aviation market will probably make a so-called "V-shaped" recovery after a quarter or two of disruption. Time will tell which approach is the correct one.
