This article has two purposes. First, let me explain why. transdime group (New York Stock Exchange: TDG) One of the best ways to buy exposure to aerospace. The company has a unique business model that has made it a private equity giant. Buy niche aerospace tools to gain pricing power and exposure in all major aerospace programs (both commercial and defense). Now let’s talk about timing. The company’s shares are down nearly 16% year-to-date, opening up new opportunities for investors looking to add aggressive growth to their portfolios.
Let’s get started!
good business model
TransDigm is an aerospace company based in Cleveland, Ohio with a market capitalization of $28.3 billion.
The company is one of the few stocks on the market with a business model that comes very close to what I would submit to the “Genius” category.
Founded in 1993, the company is a world leader in the design, manufacture and supply of highly engineered aircraft components used in virtually every commercial and military aircraft program in service today.
What’s even better is that the company isn’t just selling “random” parts – 90% of its products are unique. But that’s not all. The company estimates that 80% of his net sales are from products for which TransDigm is the sole source provider.
In other words, the company acquires smaller companies within the industry, allowing the company to become the sole provider of certain products. This helps establish more pricing power. Especially since most of the company’s products are small. For example, aggressively raising the price of a small plastic part is much easier for other suppliers than raising the price of a new engine.Again, TDG has given his 80% of its products to We are the only provider to offer it. Always helpful if the customer doesn’t have another source of information.
The company’s products are also very diverse. The company manufactures mechanical actuators and controls, ignition systems, engine technology, pumps and valves, electric motors, radio and antenna systems, winches, handling systems, safety products, and thousands of other products.
It’s not over yet. Another advantage is that most of our products create great aftermarket value. TransDigm estimates the life expectancy of the aircraft programs it sells to be 25 to 30 years. This means you can sell your product to one aircraft for up to 50 years.
The company’s top 10 customers account for approximately 42% of total sales. No customer is more than his 10% of net sales.
That being said, TransDigm is essentially a private equity company. It owns over 48 independent companies, all operating under their own names. In the United States alone, the company has 60 manufacturing sites and employs more than 7,000 people.
According to the company:
Our long-standing goal is to provide shareholders with private equity-like returns with public market liquidity. To do this, we focus both on the details of value creation and on the careful allocation of capital.
Return to growth and outperformance
Using the Seeking Alpha overview of TDG’s compound annual growth rate, we find that revenue growth has been 12.6% per annum over the past decade. During this period, the company’s annual revenue increased from about $1.7 billion to about $5 billion.
The pandemic has depressed sales performance over the last three to five years. Still, it didn’t shrink — at least not using multi-year averages.
Lockdowns, empty airports and the sudden pandemic that has created the biggest wave of uncertainty in recent history have delayed aerospace makers’ purchasing plans. No one knew what was coming. Companies preferred to work with existing inventory. So TDG and its peers have been dealing with sales pressure for about two years.
As the chart below shows, the company’s EBITDA peaked at $2.4 billion in fiscal 2019. Decrease until 2021. He just finished fiscal year 2022 is expected to be the first year to have a record in EBITDA. We also expect a sharp increase in his EBITDA margin, which is a major factor in this upward trend. Additionally, free cash flow is again expected to move gradually towards he $1 billion. That means a free cash flow yield of 3.5%, using the company’s $28.3 billion market capitalization.
Q3 2022 witnessed 23% pro forma revenue growth in commercial OEM and 44% growth in commercial aftermarket. Defense also saw flat growth as a result of delays in shipments and government spending. Also supply his chain issues with customers didn’t help.
This is what the company said in August of this year.
Demand for passenger travel is strong as travel restrictions are eased or completely lifted in many countries and the summer travel season is upon us. Domestic air traffic in China remains low but has improved from its recent sharp decline due to a strict zero-COVID policy restricting travel. China’s international traffic is finally starting to recover from the low levels of COVID.
These comments remain valid despite slowing economic growth. Short-haul travel has rebounded in the US. Long distance transportation remains a problem and a major driver of future demand growth. China is difficult to predict. So far, the Chinese continue to stick to zero COVID, which I believe will delay the long-term recovery until 2024-2025.
Given these developments, we believe the company can return to strong double-digit annual EBITDA growth. This also helps the company with its debt burden.
Acquiring growth comes with more debt. In 2012, the company’s net debt was his $3.2 billion (total debt minus cash). At the time, it was nearly 4.0 times EBITDA. Aggressive acquisitions have accelerated that number to over $15 billion. The leverage ratio was consistently above 6.0x EBITDA.
This is a problem given the ongoing rise in interest rates and weakening economic growth. About half of the company’s debt is floating rate debt.
CME Eurodollar futures are trading below $95, indicating a LIBOR rate close to 5.0%. That’s the highest since the pre-global financial crisis levels and well above what the company had to deal with when central banks in advanced economies were enforcing zero interest rate policies.
That said, TDG is in a pretty good position – despite its high (and fluctuating) debt burden. As of July 2, 2022, the company has total debt of $19.9 billion. Net debt is $16.1 billion, of which $3.8 billion is cash.
The weighted average interest rate for FY22 is 5.45%.
It is important to mention that TDG is hedging floating rates. 85% of the interest rate is fixed through calendar year 2025. This saves the company a lot of time. This allowed the company to maintain stable average interest rates. At LIBOR 2.8%, the average interest rate is 5.9%. A rise in LIBOR to 5.0% would only increase its rate by 30 basis points to 6.2%.
Additionally, the company has no major maturities until 2025. Its credit rating is B+ which is in the “junk” category.
Therefore, the company No Change capital investment priorities.
No change in priorities. The first is reinvestment in our own business. Second, acquisitions. Third, return capital to shareholders through dividends or share buybacks. And finally, debt repayment. It seems unlikely at this point, but it remains an option. I believe we remain strong and well positioned going forward in terms of overall cash liquidity and balance sheet.
Investing in your own business is easy. The company’s required capital for fiscal 2014 was approximately $35 million. This number will gradually increase and in fiscal year 2021 he will exceed $100 million. Capital spending for fiscal 2022 is expected to be $136 million. This steady increase is the result of acquisitions, inflation, and minor changes in the company’s plans.
Acquisitions are difficult (impossible) to predict. The latest deal was the acquisition of DART Aerospace for $360 million. Seeking Alpha reports:
The company said its products “has a strong presence in key commercial rotorcraft platforms and select applications for defense and safety services.” is expected to produce
Dividends are also irregular as TDG does not pay regular quarterly dividends. We are offering a special dividend. The latest he announced on Aug. 9, management said he would pay a dividend of $18.50 per share. That’s about 3.5% of the current stock price.
Earlier, TDG announced a special dividend of $32.50 after selling Souriau-Sunbank to Eaton (ETN).
Thanks to its many qualities, TDG has a stable and excellent performance. The standard deviation is high, partly due to the high debt burden (high financial risk).
Dating back to January 2007, TDG has returned 27.5% for the year, outperforming the S&P 500 by almost 20 points. In recent years, this performance has gone down a bit. But even in the last five years, including his two years during the pandemic, TDG stock has returned 18.8% annually.
How about the evaluation?
TransDigm is down 16% year-to-date. That translates to about 700 basis points ahead of the market. I believe this is largely due to the defensive exposure, the rebound in long haul demand and the fact that the balance sheet is in better shape than one might think looking at some numbers.
The stock is now again at the low end of its volatile long-term range.
The company is currently trading at $3 billion, 14.5 times its 2023 EBITDA. This is based on a market cap of $28.3 billion and his 2023 projected net debt of $15.2 billion.
This implicit rating is the lowest since the start of the pandemic and the median rating before 2020.
This isn’t going to be a guaranteed bottom, especially given the ongoing economic risks and aggressive Fed – I’ve summarized all of this in this article. Start buying at these levels if you’re looking for them.
TransDigm is one of my favorite aerospace stocks not currently owned. The only reason I don’t own TDG is the fact that I invest nearly 25% of my total net worth in aerospace and defense stocks. All are reliable dividend growth stocks. Therefore, I diversify before buying more stocks in the industry.
What makes TDG special is its dominant position in the aerospace supply chain. The company supplies critical components to all major commercial and defense programs. Most products are competition free and aftermarket sales allow up to 50 years worth of sales for each program.
This comes with pricing power and helps the company grow through organic growth and M&A. Free cash flow is up, EBITDA margins are improving, and debt hedging has helped the company get back on track after two difficult COVID years.
Thanks to ongoing economic challenges, the company is now trading at attractive prices.
There is little doubt that TDG will continue to significantly outperform the market in the long term.
(against) Do you agree? Let us know in the comments!