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TransDigm (TDG) Q4 Earnings Top, Fiscal 2018 View Upbeat

TransDigm Group Incorporated TDG reported its seventh successive earnings beat, as is fourth-quarter fiscal 2017 adjusted earnings came in at $3.48 per share, comfortably beating the Zacks Consensus Estimate of $3.38.

The figure fared even better in year-over-year comparison, rising 5.8% from the year-ago quarter’s adjusted figure of $3.29.

The bottom-line growth came on the back of robust top-line performance and improvements in the operating margin. Also, continued efforts to boost productivity, favorable product mix and lower acquisition-related costs proved conducive to the earnings growth. This was partially offset by higher interest outlay.

For fiscal 2017, adjusted net income rose 6.5% year over year to $12.38 per share.

Inside the Headlines

Net sales for the quarter amounted to $923.9 million, reflecting year-over-year growth of 5.6%. However, the top line missed the Zacks Consensus Estimate of $967 million. Organic net sales growth was 2.7%.

For fiscal 2017, net sales rose 10.5% over fiscal 2016 to $3,504.3 million, with organic net sales growth of 2.4%.

Decent growth in Defense (up 3% year over year) and Commercial Aftermarket (up 4%) revenues supplemented the top-line performance. Furthermore, contributions from the previously-completed acquisitions boosted the overall sales performance during the quarter. TransDigm’s commercial aftermarket transport business witnessed solid year-over-year revenue growth.

Majority of the company’s commercial aftermarket businesses witnessed year-over-year revenue growth, which was supplemented by stronger defense revenues. In fiscal 2017, the commercial transport aftermarket revenues were up in the mid-single-digit percentage range, which was partially offset by softness in the interior businesses, and sustained weakness in the business jet and helicopter aftermarket revenues.

TransDigm’s EBITDA (earnings before interest, taxes, depreciation and amortization) grew 8.7% year over year to $460.1 million.

Transdigm Group Incorporated Price, Consensus and EPS Surprise

During fiscal 2017, TransDigm announced the acquisition of three add-on aerospace product lines, for a total consideration of roughly $100 million. These product lines mainly comprise proprietary, sole-source products with significant aftermarket content. The product lines are in sync with the company’s long-term plan and highlight its strategy to acquire proprietary aerospace businesses with significant aftermarket content, in a bid to fortify its core business.

The acquired business lines have combined revenues of about $32 million and will be consolidated into TransDigm’s existing businesses. The company financed the acquisitions through existing cash on hand.

These acquisitions will add to TransDigm’s product range with their proprietary products that enjoy strong positions on high use of platforms, robust aftermarket content and an excellent reputation. Products offered by them include highly engineered aerospace controls, quick disconnect couplings, as well as communication electronics.

Liquidity

TransDigm ended the quarter with cash and cash equivalents of $650.6 million, down from $1587 million as of Sep 30, 2016. At the end of the reported quarter, the company’s long-term debt was $11.4 billion compared with $9.9 billion recorded at the end of September 2016.

During fiscal 2017, TransDigm repurchased 1,723,624 shares of its common stock at an aggregate cost of approximately $390 million.

Fiscal 2017 Guidance

Concurrent with the fiscal fourth-quarter results, the company issued strong earnings and revenues guidance for fiscal 2018. Sales are expected to lie in the range of $3,645 million to $3,725 million (compared with $3,504 million in fiscal 2017). Also, adjusted earnings per share are predicted to be in the band of $12.78-$13.42 per share, in comparison to $12.38 per share in fiscal 2017.

The fiscal 2018 guidance assumes that commercial aftermarket and OEM revenues will grow in mid-single-digit percentage range, while defense revenues will be up in the low- to mid-single-digit percentage range.

Additionally, projected net income from continuing operations is estimated to lie in the band of $702-$738 million and EBITDA is likely to be in the range of $1,805-$1,855 million.

Our Take

TransDigm’s thriving commercial aftermarket and defense business proved to be staple growth drivers for its fourth-quarter and fiscal 2017 results. The aftermarket business comprises 55% of sales, but makes up more than 75% of EBITDA. This translates into consistent revenue-generation capacity through all phases of the aerospace cycle. The aftermarket business is expanding as majority of aircraft bought during the financial crisis is beginning to age, and requires more frequent and comprehensive servicing.

We believe stable aftermarkets, which have historically produced higher gross margins, will continue to drive financial performance for the upcoming quarters.

However, softness in business jet, helicopter and freighter revenues, have been hurting the company’s profits. In addition to this, weakness in the global macroeconomic conditions is affecting air travel, adding to the company’s woes. The company is concerned about the commercial transport industry in the coming times as well. These factors can play spoilsport for this Zacks Rank #4 (Sell) company in the near term.

Stocks to Consider

Some better-ranked stocks in the industry include Teledyne Technologies Incorporated TDY, Rockwell Collins, Inc. COL and Curtiss-Wright Corporation CW. While Teledyne Technologies sports a Zacks Rank #1 (Strong Buy), Rockwell Collins and Curtiss-Wright carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Teledyne Technologies has a positive average earnings surprise of 37.2% for the trailing four quarters, beating estimates strongly all through.

Rockwell Collins surpassed earnings estimates in three of the trailing four quarters, resulting in an average surprise of 2.6%.

Curtiss-Wright has managed to beat estimates each time in the trailing four quarters, for a positive earnings surprise of 11.8%.

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