What happened
Shares of aerospace component supplier TransDigm Group (TDG 0.18%) gained more than 14% on Wednesday, despite a number of negative headlines coming out of the industry. The company's stock is down more than 40% year to date even after the gains and are almost certainly oversold in all but the worst-case scenario. Investors on Wednesday were more focused on the broader macro optimism than they were on any industry-specific news.
So what
TransDigm and other commercial aerospace suppliers have been hit hard by troubles experienced by the airlines due to the COVID-19 pandemic. Travel demand dried up overnight as the virus spread, causing airlines to ground significant portions of their fleets and defer new plane orders.
That's led to fewer component sales and less demand for spare parts. On Wednesday alone Airbus said it was cutting new plane production rates by one-third or more, and supplier Spirit AeroSystems announced a series of cuts to match a production slowdown instituted by Boeing.
Image source: Getty Images.
TransDigm last week said it was cutting its workforce by about 15% and instituting pay cuts for senior leaders in anticipation of a decline in sales this year.
The airlines' issues are sure to impact TransDigm and other suppliers in the near term, but there is still a question of how severe that impact will be and how long it will last. Broader markets have been strong in recent days on growing hopes that the worst of the pandemic might soon be behind us, and the U.S. economy can be restarted by late spring. That would be good news for the airlines and is giving a lift to TransDigm and other suppliers.
Now what
TransDigm is a strong company with a well-diversified business selling to both commercial aerospace and defense customers, and remains the first aerospace stock I'd recommend for new investors to the sector. But let's not kid ourselves: The current rally is based on hope of a quick recovery, but the reality on the ground remains tenuous at best, and sentiment could easily turn south again quickly.
It seems clear that commercial aerospace companies are going to take hits in the quarters to come. But for those with the patience to ride out the cycle, TransDigm remains a well-run company positioned to outperform over time.
