Shares of TransDigm Group (NYSE:TDG) traded down more than 13% on Wednesday afternoon after the company was downgraded to hold from buy at Vertical Research. The aerospace component supplier is likely in for at least a couple of down quarters as airlines cut back on spending due to the COVID-19 pandemic.
Airlines are among the businesses hit hardest by the COVID-19 pandemic, with travel demand drying up as the virus has spread. Carriers have responded by cutting flights and grounding jets, putting pressure on new plane sales from Boeing and Airbus as well as suppliers making components for those planes and providing spare parts to service the existing fleet.
Shares of TransDigm have lost half of their value in the last month due to expected issues among its customers, and the downgrades are starting to pile up. Vertical Research analyst Robert Stallard earlier in the week cut the company to a hold from a buy. That follows a double downgrade last week to underperform from buy at Bank of America, and a price target cut to $320 from $655 at Cowen.
The analysts all credited TransDigm's industry-best margins and high barriers to entry, calling the company a solid long-term bet, but in the near term it seems revenue will have to come down along with travel demand.
It's worth noting that TransDigm is now trading below $280 per share, well below Cowen's new price target and the $309 price target Stallard set when downgrading the company on Monday. TransDigm is a good company about to face a significant headwind, not a company with long-term structural issues. It also has a defense business that should hold up better in the months to come.
It's a dangerous time to be buying into the commercial aerospace supply chain, but for those interested in taking a position in the sector and hoping for the best, TransDigm remains the top stock I'd recommend owning. Just understand that a turnaround is likely going to take some time.