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The Resolution to TransDigm's $20 Million Mystery

By Lou Whiteman – Jan 7, 2022 at 8:04AM

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After a long investigation comes to a close, TransDigm Group is in the clear.

TransDigm Group has long been a top-performer due to its impressive margins but faced criticism amid an ongoing investigation into price gouging and excess profits. In this clip from Motley Fool Live, recorded on Dec. 14, Motley Fool contributor Lou Whiteman unravels the report and long-awaited conclusion.

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Lou Whiteman: We're going to be real quick here because there are a couple of questions. This is a Fool Stock Advisor pick, a great performer, an 800% performer, TransDigm Group (TDG 0.36%). It's a company I've talked about a lot. It's one of my favorite aerospace suppliers. One of the things they have been dinged on over the last year and a half is this ongoing Pentagon investigation into excess profits, which I love that term. This idea that the only reason TransDigm has been a wonderful company generating 40% plus margins as a manufacturer, software margins while making stuff, is because they are just gouging the Pentagon just like all of those stories you heard in the '80s. Well, the shorts have been banging on this thing for two years over this and the final report is finally out. John, I know we're running out of time, but I am going to share it with you right here and, I should say, since there may be a bit of tongue in cheek here, I should disclose that I am long TransDigm. So take this for what it is, but here it is, the report in full. Can you see it?

John Bromels: I see a hamburger bun.

Whiteman: That is a nothing burger. That is what we saw today. Yes, it turns out that TransDigm, which makes $2+ billion in EBITDA every year might have overbilled over a three-year period by about $20 million. The Pentagon will ask but not require them to return that. The reason they are going to ask but not require is that the IG's office, the Inspector General, determined that it is Pentagon process and not anything that TransDigm is doing to try to be sneaky that caused the $20 million. They also put in there that we couldn't really account for all of the overhead so that $20 million is probably the worst-case scenario. Transdigm has basically moved on from this. There are still people on Twitter (NYSE:TWTR) screaming about how they are price gouging, excess profits. I muted it a long time ago. I would advise everyone else to do the same. I know we're out of time but I thought since we finally have a resolution here, yes, those bad, bad, bad corporate raiders did get $20 million out of the government because maybe the government's checks aren't as good as they are and now we can move on and see if the company is still in business after that.

John Bromels owns Twitter. Lou Whiteman owns TransDigm Group. The Motley Fool owns and recommends Twitter. The Motley Fool recommends TransDigm Group. The Motley Fool has a disclosure policy.

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