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Can TransDigm Group Keep Climbing to All-Time Highs?

By Dan Caplinger - May 4, 2015 at 9:56AM

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The company's next earnings report is right around the corner. Can TransDigm live up to high expectations?


Source: TransDigm.

The aerospace industry has enjoyed a huge boom over the past decade, as aircraft manufacturers have seen huge orders from profit-rich airlines seeking to become more efficient. Aerospace parts-maker TransDigm Group (TDG -1.32%) has profited handsomely from the surge in aerospace demand, with its provision of new parts to original equipment manufacturers as well as high-quality aftermarket parts and components for those seeking replacements for maintenance needs. Coming into TransDigm's fiscal second-quarter financial report Tuesday morning, investors have sent shares of the aerospace-components manufacturer to all-time record highs, and they'll want to see confirmation of the company's uptrend in revenue and earnings. Let's take a closer look at what TransDigm Group is likely to tell its shareholders in its report along with major events for the company in recent months.

Stats on TransDigm Group

Analyst EPS Estimate

$2.01

Change From Year-Ago EPS

7.5%

Revenue Estimate

$631.61 million

Change From Year-Ago Revenue

6.9%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will TransDigm earnings rebound?
Investors have been more upbeat in their expectations about TransDigm Group's earnings growth, adding more than a dime per share to their full-year fiscal 2015 projections and raising next year's earnings outlook by almost 4%. The stock has jumped considerably, rising 8% since late January.

Last quarter's report from TransDigm shows just how much investors expect from the company. Revenue and net income both jumped 11%, but that was a considerable slowdown compared to growth figures from the 2014 fiscal year and fell short of what most of those following the stock had wanted to see. Much of TransDigm's past growth has come from acquisitions, and the company warned that 2015's growth rates could be far weaker than 2014's results, with projections for revenue gains in the single-digit percentage range.

Source: TransDigm.

To help bolster growth, TransDigm has restarted its acquisition engines. In March, the company completed its purchase of Telair Cargo Group from aviation specialist AAR, paying $725 million in cash to acquire a business that brings in about $300 million in revenue annually. Then last month, TransDigm announced that it would add the aerospace business of Germany's Franke Aquarotter to its portfolio of purchases, boosting TransDigm's exposure to major Airbus, Bombardier, and Embraer aircraft platforms. Finally, just last week, TransDigm announced a nearly $500 million purchase of Pexco Aerospace, which makes extruded plastic interior parts in commercial airliners. Pexco does substantial business with Boeing, which also complements TransDigm's existing books of business quite well. Overall, TransDigm's approach to mergers and acquisitions aims at creating a well-integrated one-stop shopping experience for its major customers, and each of these acquisitions pushes TransDigm toward a more complete line of products to serve the aerospace industry's needs.

One source of confusion about TransDigm centers on its return on equity, which is negative. Yet the reason isn't entirely bad, as healthy payouts to shareholders in the form of special dividends express TransDigm's commitment to returning capital to investors even though it leads to this unusual situation on its balance sheet. With the company earning a solid profit, you shouldn't reach the wrong conclusion about TransDigm merely from looking at traditional metrics of internal investment success.

In the TransDigm Group earnings report, pay close attention to how the company expects to integrate all of its recent acquisitions and what impact the new businesses could have on the company's overall results. Even as the stock has continued to climb, TransDigm has plenty of growth prospects given the health of the airline industry overall. As long as aerospace manufacturers continue to build massive backlogs and take steps to increase production capacity, TransDigm should be able to benefit from the rising interest in the industry and see potential for further share-price gains.

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TransDigm Group Incorporated
TDG
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