Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of TransDigm Fell in January

By Lou Whiteman - Feb 2, 2021 at 1:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An airline recovery is going to take time.

What happened

Shares of TransDigm Group (TDG 3.84%) fell 10.6% in January, according to data provided by S&P Global Market Intelligence, despite not a lot of company news. Investors are still grappling with how to think about commercial aerospace suppliers as the pandemic hopefully subsides, and there wasn't a lot of reason for optimism as the month went on.

So what

TransDigm is a diversified manufacturer of parts for military and commercial aerospace applications, but the majority of its profits come from spare part sales to airlines and commercial operators. The stock lost more than half of its value in the early days of the pandemic, but slowly regained most of what it lost as 2020 progressed.

A plane under construction in a hangar.

Image source: Getty Images.

Entering 2021 it is hard to get a gauge on how quickly airlines will see travel demand rebound, and what that will mean for earnings at companies like TransDigm that count on airlines as customers. But with daily travel stats falling off in January following a holiday season uptick, there aren't a lot of reasons for optimism.

TransDigm did receive a mid-month downgrade to neutral at Bank of America on valuation concerns, but analyst Ronald Epstein did raise his price target to $670 per share from $550, providing nearly 15% upside potential compared to its price on Feb. 2.

I believe the downward pressure had more to do with investor pessimism about the speed of aerospace recovery. Note that shares of both airplane maker Boeing and Heico, a parts supplier often compared to TransDigm, followed a similar trajectory for the month.

TDG Chart

TDG, BA, and HEI data by YCharts

Now what

It is impossible to know how quickly a recovery will happen, but if you believe travel demand will eventually bounce back and have the patience to ride out the turbulence, there seems to be no reason not to buy TransDigm right now. For years, critics of the company questioned whether its high debt levels would sink it during a downturn, and wondered whether its software-like 40%-plus margins were sustainable.

We've just gone through the worst downturn in aviation history, and TransDigm not only survived but had enough cash on hand to announce a $965 million acquisition. And the margins remained rock-solid through the downturn, in part because nearly 80% of TransDigm's total costs are variable. For long-term holders, there is a lot to like about TransDigm right now.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

TransDigm Group Incorporated Stock Quote
TransDigm Group Incorporated
TDG
$538.75 (3.84%) $19.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.