TransDigm Group (NYSE: TDG) beat estimates for the quarter, provided guidance that contains upside relative to expectations, and announced plans to put some of its cash pile to work. Investors are cheering the moves, sending TransDigm shares up 9.4% as of 11 a.m. EST Thursday.
TransDigm is hardly a household name, but the supplier of components for military and commercial aerospace platforms has been one of the top performers in its sector for some time now. Shares of TransDigm have gained more than 560% over the past decade, easily surpassing the S&P 500‘s 147% return.
The latest quarterly results provide no indication the momentum is slowing. TransDigm reported earnings of $8.03 per share in its fiscal fourth quarter ending Sept. 30 on revenue of $1.85 billion, topping Wall Street consensus for $7.53 per share in earnings on sales of $1.83 billion. Commercial spare-parts sales climbed 27% in the quarter, and defense sales grew by 15%.
TransDigm generated an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 52% for the quarter, which, though down slightly from the previous quarter, is still impressive for a hardware-focused business. The company is a roll up of aerospace businesses focused on the manufacture of parts that are either patent-protected or hard to commoditize.
The company also announced a special, one-time dividend of $35 per share and agreed to acquire the Electron Device business of Communications & Power Industries for $1.385 billion in cash. The business to be acquired generates about 70% of its revenue from spare parts, which tend to be more lucrative than equipment for new airframes, and nearly all its sales come from products that are considered proprietary.
TransDigm has always been something of an anomaly in what is mostly a low-margin, commoditized industry. The company’s private equity-like model of acquiring underappreciated assets and streamlining operations, combined with its focus on businesses that have competitive moats, has paid off for investors over time. The Electron Devices buy appears to be a good fit and in keeping with that strategy.
The company carries $19.892 billion in debt at a 5.8% weighted average interest rate but has no significant maturities until 2026. TransDigm’s willingness to pay a special dividend is an indication management is confident about its future and is not shifting focus as interest rates are on the rise, which should be a reassuring sign for investors.
Commercial aerospace demand is high right now, and TransDigm to some extent is enjoying the benefits of the high in what has historically been a cyclical business. But the track record of outperformance goes well beyond a single cycle, and TransDigm’s quarter suggests it is business as usual despite a changing rate environment.
For long-term focused investors, TransDigm remains a good candidate to be a foundational part of a diversified portfolio.
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Lou Whiteman has positions in TransDigm Group. The Motley Fool recommends TransDigm Group. The Motley Fool has a disclosure policy.
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