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5 Strengths That Helped TransDigm Group Gain Altitude This Quarter

By Brendan Mathews – Feb 5, 2014 at 1:13PM

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The aerospace component supplier soared over Wall Street's expectations.

Aircraft part maker TransDigm (TDG -0.78%) handily beat analyst estimates this quarter and the stock has traded up on the news. Let's dig into the details with these five key takeaways from earnings.

1. Sales, earnings, and cash generation advanced nicely
Sales increased 23% to $529 million, including organic sales growth of 9%. The company's new and existing businesses are pulling their weight.

Earnings before interest, taxes, depreciation, and amortization, or EBTIDA, as defined increased 21% to $200 million. This number, "EBITDA as defined," is a rough proxy for the cash the company can use to reinvest or reward shareholders, and that level of growth is truly excellent.

Total accounting profits increased 16% to $86 million, and adjusted earnings per share, or EPS, increased 10% to $1.66. Those figures didn't advance as quickly as revenue because of higher interest expense and management's decision to exercise stock options. Still, it was an excellent result.

2. Profitability remains high
Gross profit margins fell 170 basis points to 53.7%. But that's still a very high gross margin for an industrial company, and it indicates TransDigm's strong competitive position. Net income margins remain relatively high at 16%. Clearly, this is a highly profitable business.

3. Strategy and capital allocation framework remains sound
CEO Nick Howley reiterated the company's focus on developing its own operations and acquiring aerospace businesses with significant proprietary products and aftermarket sales. Howley also emphasized the company's four options for capital allocation: reinvesting in current businesses, making accretive acquisitions, paying down debt, or returning cash to shareholders.

4. Balance sheet is levered, but not overextended
At present, the company has more than $5.7 billion in debt. But I have no doubt that TransDigm will be able to service that debt, thanks to its sustained and consistent cash flows. In fact, the company expects to throttle back its leverage enough to reduce the ratio between its net debt to EBITDA as defined from 5.4 to 4.7 by the end of the year.

Meanwhile, the company has cash in the bank to cover any near-term liquidity issues. The company ended the quarter with $411 million in cash, and it expects to end the year with a total cash pile of $750 million.

5. Outlook for 2014 improved
TransDigm increased its guidance for 2014 from an initial $7.16 per share in adjusted earnings to a significant $7.50.

Foolish bottom line
After the earnings pop, TransDigm is trading around $172 per share -- about 23 times its adjusted EPS for 2014. Obviously, that's a higher multiple than the market, but TransDigm is a highly profitable business with a great strategy and a terrific management team. I have no doubt that it deserves that premium.

Brendan Mathews has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

TransDigm Group Stock Quote
TransDigm Group
$609.70 (-0.78%) $-4.77

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