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TransDigm (TDG) Beats on Q2 Earnings, FY17 View Positive

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TransDigm Group Incorporated TDG reported its fourth successive earnings beat, as second-quarter fiscal 2017 adjusted earnings came in at $2.88 per share (including stock-based compensation adjustments), comfortably beating the Zacks Consensus Estimate of $2.85.

The figure fared even better in year-over-year comparison, rising 5.9% from the year-ago quarter’s adjusted figure of $2.72.

The bottom-line growth came on the back of robust top-line performance and improvements in operating margin. Also, consistent efforts to boost productivity, favorable product mix and lower acquisition-related costs proved conducive to the earnings growth.

Inside the Headlines

Net sales for the quarter came in at $873.2 million, representing an impressive year-over-year growth of 9.6%. However, the top line lagged the Zacks Consensus Estimate of $886 million.

Decent growth in Defense (up 3% year over year) and Commercial OEM (up 2%) revenues supplemented the top-line performance. Furthermore, contributions from the previously completed acquisitions and favorable product mix supported the sales performance.

Majority of the company’s commercial aftermarket businesses saw year-over-year revenue growth. Overall, the soft commercial aftermarket revenue growth was mostly offset by stronger defense revenues. Further, year-to-date commercial aftermarket bookings for the company are running ahead of shipments, which bodes well for the company’s performance in the upcoming quarters.

TransDigm’s EBITDA (earnings before interest, taxes, depreciation and amortization) grew 16.5% year over year to $397.7 million.

Acquisitions

In February, TransDigm announced the acquisition of SCHROTH Safety Products GmbH, and aviation & defense assets and liabilities of Takata Corporation, for a total of $90 million in cash. The acquired units will operate as a single business – SCHROTH – and will focus on designing and manufacturing proprietary, highly engineered, advanced safety systems for aviation, racing, and military ground vehicles.

SCHROTH Safety Products comprises the lion’s share of revenues (about 90%) in this deal. In this transaction, most of the revenues will come from proprietary products, with aftermarket content accounting for approximately 40% of the revenues, and aerospace & defense representing 80% of the revenues. This move reflects TransDigm’s strategy to acquire proprietary aerospace businesses with significant aftermarket content, in a bid to fortify its core business. Given that SCHROTH has a growing aftermarket presence on attractive high-use platforms, TransDigm believes that it will contribute significantly toward its core business.

Transdigm Group Incorporated Price, Consensus and EPS Surprise

Liquidity

TransDigm ended the quarter with cash and cash equivalents of $985.4 million, down from $1587.0 million as of Sep 30, 2016. At the end of the reported quarter, the company’s long-term debt was $10.8 billion compared with $9.9 billion at the end of Sep 2016.

During the quarter, TransDigm repurchased 1,517,824 shares of its common stock at an aggregate cost of approximately $340 million under the existing stock repurchase program. Also, in March the company authorized a new $600 million stock repurchase program to replace the existing one. As on Apr 1, the amount left over for repurchase under the new program were roughly $410 million.

Fiscal 2017 Guidance

The company updated its fiscal 2017 guidance to reflect its recent acquisition of Schroth, and higher interest expense. Now, TransDigm projects net sales to be in the range of $3,530–$3,570 million compared with the earlier guided range of $3,520–$3,570 million. Similarly, adjusted earnings are forecast to lie within the range of $12.09–$12.33 per share compared with the earlier guidance of $12.02–$12.30 per share.

Additionally, TransDigm Group projected net income to lie in the band of $605–$619 million and EBITDA to be in the range of $1,693–$1,713 million. The earlier guided range of net income and EBITDA were $609–$625 million and $1, 686–$1,710 million, respectively.

Our Take

TransDigm Group delivered better-than-expected fiscal second-quarter results. The company’s constant focus on value-based operating strategy manifested itself in both the top- and bottom-line beats. About 90% of its sales were generated by proprietary products, that is, products for which the company owns the intellectual property. This translates into consistent revenue generation capacity through all phases of the aerospace cycle. We also believe that stable aftermarkets, which have historically produced higher gross margins, will continue to drive financial performance for the upcoming quarters.

However, on the negative side, softness in business jet, helicopter and freighter revenues, have been hurting the company’s profits. In addition, 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 the Zacks Rank #4 (Sell) company in the near term.

Stocks to Consider

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

Rockwell Collins surpassed earnings estimates in each of the trailing four quarters, resulting in an average surprise of 2.5%.

CAE Inc managed to beat estimates thrice in the trailing four quarters, for a positive earnings surprise of 13.4%.

Esterline Technologies has a positive average earnings surprise of 34.9% for the trailing four quarters, beating estimates all through.

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