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Analyst Blog

On Mar 11, 2014, we issued an updated research report on TransDigm Group Inc. (TDG - Analyst Report). The company reported strong first-quarter fiscal 2014 results, which included a 26% positive surprise. It also announced the acquisition of proprietary aerospace business Airborne Systems in the fiscal first-quarter 2014. The acquisitions of Whippany, Arkwin and Aerosonic closed in previous quarters contributed about $184.1 million to the revenues of fiscal 2013.

TransDigm Group has delivered positive earnings surprise in three of the last four quarters, with an average beat of 35.6%.

With the first-quarter results, TransDigm raised its expectation for fiscal 2014 to reflect its quarterly outperformance and addition of Airborne Systems in its portfolio. The company now projects net sales in the range of $2.28 billion to $2.34 billion, compared with the former projection of $2.1–$2.2 billion.

TransDigm also raised the outlook for fiscal 2014 net income in the range of $375–$393 million from $372–$390 million. Adjusted earnings per share are expected to be in the band of $7.35 to $7.65 as against $7.00 to $7.32 guided previously.

TransDigm is favorably positioned in the aerospace market. About 90% of its revenues are generated from proprietary products and the company is the sole provider of three fourths of the products sold. The company’s aftermarket business has proved to be stable even amid economic downturns, as it accounted for about 54% of revenues and a higher share of earnings before interest, taxes, depreciation and amortization (EBITDA).

The company’s financial performance reflects its ability and commitment to enhance shareholders’ value. TransDigm’s strong free cash flow and well-planned capital structure are expected to further reward shareholders, going forward. At the quarter-end, TransDigm had an additional capacity of $1.5 billion, which could be used to finance more acquisitions.

TransDigm’s performance led to positive estimate revisions over the past 7 days. As a result, the Zacks Consensus Estimate for fiscal 2014 increased 0.1% and is currently pegged at $6.61 per share. For fiscal 2015, the Estimate rose 0.6% to $8.40, reflecting a scope for the company’s growth in the long run. The expected long term earnings growth rate for the stock is 17.2%.

TransDigm has a Zacks Rank #2 (Buy). Other players in the aerospace equipment manufacturing sector, which look attractive at present, include Alliant Techsystems Inc. (ATK - Analyst Report), BAE Systems plc. (BAESY) and Astronics Corp. (ATRO - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

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