TransDigm: Flying High Again
About a year ago I concluded that shares of TransDigm (NYSE:TDG) were preparing for lift-off. I arrived at this conclusion after the company has seen a year of stagnation with end markets recovering slowly from the pandemic. At the time shares saw a modest boost as a result of its exposure to the defense sector, amidst the outbreak of the war between Russia and Ukraine. A Publicly Traded Private Equity Play The paragraph header is how I look at TransDigm, essentially a publicly listed private equity business focused on aviation. The company is an M&A roll-up story as it employs aggressive pricing strategies, employing higher leverage, creating quite some volatility in some uncertain periods of time. In the year 2019 - ahead of the pandemic - the company posted $2.8 billion in EBITDA on $5.2 billion in sales, resulting in astonishing margins. Net debt of around $15 billion translated into around a 5 times leverage ratio, as the company paid out a huge special dividend ahead of the pandemic. High leverage is in part mitigated by company-favorable covenants, fixed interest rates and long term maturities, with shares trading at $650 pre-pandemic. Despite the pandemic clearly having an impact, the company continued its M&A strategy with a billion deal for Cobham Aero announced by the end of 2020 as shares had recovered to the $600 mark already. These were high valuations given the leverage employed, and the fact that 2020 earnings only trended at $12 per share, while 2019 peak earnings came in around $20 per share. Besides the high valuation and leverage concerns, there was the concern on pricing scrutiny as well, with politicians getting involved on the matter as well. This is a long term concern of mine, as >50% EBITDA margins might not just come from operational efficiency, but from pricing practices as well. By April 2022 shares traded at $638 per share as the 2021 results (for the year ending in Sep...
