Aerospace companies throughout the industry have taken advantage of the boom in commercial aircraft sales, with new models meeting with high demand from buyers interested in upgrading their aging airplane fleets. Coming into Tuesday morning's fiscal third-quarter financial report, TransDigm Group (NYSE:TDG) investors expected that the maker of aircraft components and systems would continue to enjoy the strong sales and profit growth that it had shown in the past. Although TransDigm didn't live up to all of the high expectations that investors had, it nevertheless posted solid results and boosted its guidance for the remainder of the year. Let's take a closer look at TransDigm and what its latest results suggest about how well the company will perform in the future.
TransDigm flies higher
TransDigm Group's fiscal third-quarter results showed an uptick in growth, although they didn't quite match with the consensus forecasts among those following the stock. Revenue rose 13% to $691.4 million, but investors had expected a much larger bump all the way to $722 million. Similarly, although the company reversed a year-ago loss on a GAAP basis and grew adjusted net income by 11% to $128.1 million, the resulting adjusted earnings of $2.26 per share fell a penny short of analyst projections.
Looking more closely at TransDigm's results, the aerospace specialist continued some of the same trends we've seen in past quarters. TransDigm's acquisitions played a vital role in fostering growth, with the company saying that the acquisitions of Telair Cargo Group and units of Franke and Pexco were responsible for roughly 80% of the company's overall growth during the quarter, with the remainder coming from internal organic growth. Those acquisitions also had a slightly adverse impact on TransDigm's balance sheet, as outstanding debt climbed by a quarter to $7.9 billion as part of the refinancing transactions that helped pay for the company's purchases. As a consequence, interest expense jumped by 22% compared to the year-ago quarter, and that was a significant influence that weighed on earnings during the quarter.
Nevertheless, TransDigm CEO Nicholas Howley continued to highlight the importance of M&A activity to the company's future. Referring to both its completed purchases and its recent agreement to buy component and systems maker PneuDraulics, Howley said, "All four of these businesses fit well with our long-term focus on proprietary aerospace businesses with significant aftermarket and good opportunities for value creation."
Can TransDigm keep climbing?
As we've seen repeatedly in the past, TransDigm's acquisition-based strategy results in consistent updates to its guidance, and this quarter was no exception. The company now believes that its sales will be between $2.69 billion and $2.71 billion, up between $20 million and $30 million from last quarter's estimate. Adjusted earnings got a bigger upgrade to a range of $8.64 to $8.78 per share, with the low end rising by about $0.15 per share compared to previous guidance. With investors looking for adjusted earnings of $8.70 per share on sales of $2.72 billion, though, the upgrade wasn't entirely unexpected and actually fell slightly short of what many had hoped to see. The new guidance doesn't include the potential impact of the PneuDraulics acquisition, though, and so it could provide the boost that investors need in order to be satisfied with TransDigm's 2015 performance in the end.
On a cautious note, the company still expressed a worrying comment that attentive investors picked up on. In Howley's comments, the CEO noted that although "our defense business continued stronger than originally anticipated," TransDigm encountered "some softness in the commercial aerospace business." After such a long period of improving growth prospects for aerospace, even that innocuous comment could foreshadow a slower future ahead.
For now, TransDigm Group shares remain near their all-time highs, and the company is working hard to secure its growing leadership position in supplying the aerospace industry with all of its parts and component needs. With the stock sporting fairly rich valuations compared to earnings, though, TransDigm will need to outperform the expectations of investors in the long run in order to sustain the share price's current growth path.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group. The Motley Fool owns shares of TransDigm Group. Try any of our Foolish newsletter services free for 30 days. 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.