A New Wide-Moat in Aerospace
Transdigm's competitive advantages stem from intellectual property and high switching costs on its products.
Despite the run-up in Transdigm's (TDG) share price, we still see value in the name thanks to its Exemplary stewardship of capital and wide moat. Transdigm manufactures products for use onboard aircraft, including pumps, valves, actuators, water faucets and systems, audio systems, cargo handling systems, and lighting and instrumentation. Transdigm also makes products for electronic, fluid, power, and mechanical motion control onboard aircraft, and it also supplies products used for cabin structures, laminates, pallets, and host of other applications. For fiscal 2016 we expect the company to generate roughly 70% of sales from commercial customers--airlines and parts distributors in the aftermarket (39% of total 2016 sales) and aircraft manufacturers like Boeing and Airbus (32% of total 2016 sales) for original equipment sales--and about 30% from defense customers. We believe strong air travel demand--70% of sales are commercial aerospace related--and a rebound in U.S. defense spending will combine with Transdigm's well-oiled M&A machine to drive sales and EBITDA higher at a 12.5% and 13.2% annual pace, respectively, over the next five years. Our $310 fair value estimate translates into a 3-star rating, and we think long-term investors will be well served holding the name.
Since the company's founding in 1993 and its IPO in 2006, Transdigm's management has judiciously allocated capital to M&A, shareholders, and internal projects, which has resulted in returns consistently above the cost of capital. Management successfully integrates multiple acquisitions each year, explicitly targeting firms with wide moats, and it typically doubles EBITDA within five years at acquired companies. Total returns to shareholders stand at over 1,000% from 2006 until today versus 149% for the iShares US Aerospace & Defense Index.
Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.