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TransDigm Rides High on Solid Execution, Strategic Buyouts

Last week, TransDigm Group Incorporated TDG reported its third-quarter fiscal 2018 results, wherein it continued with its impressive earnings streak for the fifth consecutive quarter. Buoyed by positive industry trends and solid operational execution, the company expects to continue its earnings momentum on the back of complementary acquisitions and steadily growing end markets.

We believe, an outstanding performance in the aerospace segment, commercial aftermarket and defense business bode well for the growth for rest of the fiscal year.  Also, the company, which enjoys a robust foothold in an expanding aerospace market which has several growth drivers working in its favor. Read on to find out the key drivers for this company right now.

Factors at Play

TransDigm’s long-term growth strategy rests on five pillars namely, expanding its proprietary aerospace businesses; executing value-based operating strategy; decentralized organization structure; strategic acquisitions and a diligent capital allocation strategy.

An excellent business operation model, which implements value-based operating strategies, has helped the company to generate sufficient organic & inorganic growth and drive operating margin expansion over the past few quarters.   

TransDigm’s frequent acquisitions of proprietary aerospace businesses with significant aftermarket content, has helped it secure its place in the core market and grab greater market share. The company’s acquisition integration process focuses on increasing prices, diminishing costs, and winning new business.  

During the third quarter, the company announced the acquisition of three add-on aerospace product lines, for a total consideration of roughly $100 million. 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.

However, on the flip side, the company is currently affected by a growing debt burden and consequent higher interest expenses. Also, the company’s interest expenses have been trending upward for the last few quarters. In fact, TransDigm expects its debt servicing costs to rise almost 24% year over year to around $600 million in fiscal 2017.

The company has been suffering from prolonged weakness in some of its major end market, which has thwarted its growth momentum. Softening discretionary retrofits, interior retrofits and weaknesses in jet and helicopter markets have impacted the company’s top-line performance in recent times.

Stocks to Consider

Some other stocks worth considering in the same space include Curtiss-Wright Corporation CW, Heico Corporation HEI and Huntington Ingalls Industries, Inc. HII.

Curtiss-Wright Corporation surpassed earnings estimates every time in the trailing four quarters, resulting in an average surprise of 7.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Heico Corporation has managed to beat estimates thrice in the trailing four quarters, for a positive earnings surprise of 5.8%.

Huntington Ingalls Industries has a positive average earnings surprise of 8.6% for the trailing four quarters, beating estimates twice.

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Huntington Ingalls Industries, Inc. (HII): Free Stock Analysis Report
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