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Here's Why TransDigm Stock Can Keep Flying Higher

By Lou Whiteman - Nov 27, 2020 at 8:00AM

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The stock has recovered nicely since the early days of the pandemic. The rally isn't over yet.

The pandemic has hit airlines hard, and has taken commercial aerospace companies down as well.

In this Motley Fool Live clip from Nov. 19, Motley Fool contributor Lou Whiteman explains why TransDigm Group ( TDG 0.29% ) is his top commercial aerospace pick, arguing that even after a recent surge higher the stock still has room to run.

 

Lou Whiteman: TransDigm Group is the maker of parts for airplanes. It probably wouldn't surprise you to hear the stock lost more than half of its value during a short period in March. But it's battled back and with this 20% surge in the last month, it's actually up slightly for the year. That's great, but there's still further it can go. A bit about this company, it's basically a PE firm disguised as an aerospace stock. They buy companies, they extract better performance out of them, and they leave them alone. It's a manufacturing business that generates margins north of 40 percent. They've been doing that for a decade. Cynics and bears have been staying for a decade, it can't last. Guess what? It keeps lasting and it's lasted through this pandemic. Their focus is on the aftermarket; that's spare parts sold to operators, it's not the parts that go into new planes. I think the aftermarket is going to rebound well before new plane sales, because this airlines slowly trying to normalize their operations. They're going to be leaning heavily on their existing fleets. They're not going to have the ability and the balance sheet to buy new planes. Companies like TransDigm should see a recovery before companies like Boeing ( BA 1.43% ). TransDigm, as I said, they are a serial acquirer. They very rarely had this much cash available. They've been very conservative through this. They have more than five billion dollars to deploy. If history is a guide, they won't sit on it. They're good at doing deals. I really hope they go shopping, if they don't, I would expect to see another huge special dividend in months to come. There's a lot of ways for this company to when it's come back along way, but I think it's got a lot more to run. It's still my favorite commercial aerospace stock even after the run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

TransDigm Group Incorporated Stock Quote
TransDigm Group Incorporated
TDG
$603.36 (0.29%) $1.74
The Boeing Company Stock Quote
The Boeing Company
BA
$208.83 (1.43%) $2.95

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