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Why Shares of TransDigm Fell 40% in March

By Lou Whiteman – Apr 2, 2020 at 12:32PM

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Commercial aerospace is experiencing a reset of expectations.

What happened

TransDigm Group (TDG 0.07%) has long been a highflier among aerospace stocks, with the shares gaining more than 1,000% during a 10-year period ending last December. But the stock came crashing down to earth in March, losing 42.6% of its value, according to data provided by S&P Global Market Intelligence.

The issue was the COVID-19 pandemic, and more specifically the outbreak's impact on global travel. An unprecedented decadelong commercial aerospace up cycle appears to have come to a sudden end, and near-term estimates are going to have to come down with it.

So what

TransDigm has carved out an attractive niche providing hard-to-engineer parts for commercial aerospace and defense platforms and supplying spare parts. That business is sure to take a hit from the pandemic, as airlines have reacted to plummeting demand for travel by cutting flights and grounding planes.

A plane under construction on the assembly line.

Image source: Getty Images.

Hopefully some of that travel demand will come back once the pandemic is contained, but even in the best-case scenario, airlines are likely to be conservative when it comes to growth plans for 2020 at least.

TransDigm was dealt a series of downgrades late in the month as analysts reset expectations for calendar 2020 and beyond. There is still a lot to like about the company, including its software-like 40%-plus margins, but given the current state of travel, the next few quarters are unlikely to live up to expectations.

Now what

On April 2, TransDigm seemingly confirmed investor fears that there will be no quick turnaround following the pandemic, announcing it was cutting its workforce by about 15% and that senior executives are taking a pay cut.

Commercial aerospace is likely to be an ugly business for some time to come, and there is no reason to rush in and buy on this dip. But the long-term growth forecast for travel is likely to survive the pandemic, and over the long run I would expect aerospace to perform well for investors. For those who want to buy in now and wait out the downturn, TransDigm -- even after all the losses -- remains the top aerospace stock I'd recommend for new investors.

This is a strong company facing substantial headwinds.

Lou Whiteman owns shares of TransDigm Group. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.

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