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Transdigm (TDG) Up 6% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Transdigm Group Incorporated (TDG - Free Report) . Shares have added about 6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is TDG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

TransDigm Q2 Earnings Strong, Sales Up Y/Y, View Up

TransDigm reported second-quarter fiscal 2018 adjusted earnings of $3.79 per share, which reflected growth of an impressive 25.1% year over year. The bottom line gained from the favorable impact of the recent tax reforms.

Decent top-line growth and improvements in the operating margin also drove earnings. In addition, continued efforts to boost productivity, lower refinancing costs as well as lower acquisition-related costs proved conducive to earnings growth. This was partially offset by higher interest outlay.

Inside the Headlines

Net sales for the reported quarter amounted to $933.1 million, reflecting year-over-year growth of 7.4%. Organic sales grew 6.6%.

Decent growth in Commercial Aftermarket revenues supplemented the top-line performance. Furthermore, contributions from the previously-completed acquisitions boosted the overall sales performance during the fiscal second quarter.

TransDigm’s EBITDA (earnings before interest, taxes, depreciation and amortization) grew 9.8% year over year to $463.1 million.

Acquisitions & Divestitures

TransDigm frequently acquires proprietary aerospace businesses with significant aftermarket content, which boosts its footprint in its core market and is in line with its operating strategies. During the quarter, it acquired the Kirkhill engineered elastomers business from Esterline Corporation for $50 million. The Kirkhill business makes specialty seals and other rubber components meant primarily for aerospace and defense markets.

Also, TransDigm completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61 million.

Earlier, during fiscal 2017, TransDigm had 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 the proprietary products which enjoy strong positions on high use of platforms, robust aftermarket content and an excellent reputation. Products offered include highly engineered aerospace controls, quick disconnect couplings, as well as communication electronics.

Liquidity

TransDigm ended the fiscal second quarter with cash and cash equivalents of $1,011 million, up from $650.6 million as of Sep 30, 2017. At the end of the reported quarter, the company’s long-term debt was $11.4 billion, nearly flat compared with the figure recorded at the end of September 2017.

Fiscal 2018 Guidance

Concurrent with the fiscal second-quarter results, the company raised its revenue and earnings guidance for fiscal 2018, to incorporate the impressive operating performance so far in fiscal 2018, new tax regulations and recent acquisitions. Adjusted earnings per share are now forecast to be in the band of $17.35-$17.99 per share, in comparison to the earlier guided range of $16.95-$17.59 per share. The company had generated earnings of $12.38 per share in fiscal 2017.

Sales are now expected to lie in the range of $3,740-$3,820 million (compared with $3,645-$3,725 million guided earlier). Estimated net income from continuing operations lies in the band of $902-$938 million, compared with the earlier projection of $906-$942 million, while EBITDA is likely to be in the range of $1,830-$1,880 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter.

VGM Scores

At this time, TDG has an average Growth Score of C and a grade with the same score on the momentum front. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise TDG has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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