TransDigm Earnings: Growth Accelerates With Recovery in Commercial Air Travel; Lifts FVE to $730

After TransDigm TDG reported second-quarter results, we forecast accelerated revenue and profit growth in the near term and have increased our fair value estimate to $730 per share from $700, primarily reflecting the company’s runway for continued investment and impressive margin expansion at this wide-moat business.

We see no shortage of opportunities for TransDigm to continue to cultivate its portfolio of profitable niche products in the commercial and military aviation aftermarket. The company’s persistent focus on supplying esoteric and highly engineered aircraft parts engenders powerful switching costs for its customers, and we don’t foresee this dynamic changing in this market segment anytime soon.

Indeed, management commented that its pipeline for potential acquisition targets has grown, and at the end of the quarter, TransDigm completed the acquisition of Calspan, a firm based in Buffalo, New York, where it operates a wind tunnel and test facility capable of testing hypersonic wind conditions. TransDigm paid $725 million for Calspan, with approximately $200 million in annual revenue, well within its historical pricing range. Although Calspan is more of a service provider (that is, wind tunnel testing) than parts manufacturer, we see the distinction in this case as making little difference: many of the parts delivered in the aerospace industry also come with many hours of engineering services to back them up, including testing and certifying they meet manufacturing criteria, such as for tolerance of temperature, pressure, or radiation.

We anticipate that TransDigm can grow faster than the overall aircraft parts and service market because of its consistent organic growth supplemented by acquiring smaller companies. TransDigm has demonstrated capacity to increase pricing, even in times of distress in the aerospace market, and we expect increasing flight activity to drive a years-long recovery in this market.