TransDigm Group (TDG) designs, manufactures, and supplies aerospace components in the U.S. and abroad.
The company is organized into three segments:
- Power & Control produces components for energy delivery and control in aircraft.
- Airframe manufactures systems and components for airframes and cabins of aircraft.
- Non-aviation produces products for non-aerospace markets.
The primary customers include engine and power system suppliers, airlines, military agencies, and service companies.
The company is interesting because most of its products generate significant revenue from aftermarket sales (approximately 56%). Historically, revenue from aftermarket services has provided higher gross margins and been more stable than the net sales of OEM manufacturers. Given that both Boeing and Airbus have adjusted their annual delivery targets, airlines and other operators of aviation equipment will also be forced to revise their plans for retiring older models, which will require more careful maintenance and possibly modernization of individual components. Furthermore, the head of Airbus recently mentioned that there are currently supply chain issues concentrated on specific aircraft components, mainly in engines, airframes, and cabin equipment. This indicates control over pricing and suggests continued high demand for TransDigm's products.
In Q2 2024, orders for commercial aftermarket services significantly exceeded sales, leading to an average growth of 10% year-over-year. The results will be negatively impacted by the cargo and defense segment until the end of the year; however, the next year is expected to be moderately positive for these markets.
Despite its high multiples, the price of TDG shares is fully justified by growth rates and market position. As management emphasizes, merger and acquisition activity is at its highest level, focusing mainly on small and medium-sized deals. In May, TransDigm acquired two companies for a total of approximately $800 million, and about $2 billion was spent on acquisitions in 2023. According to Factset data, no investment house downgraded its 12-month target in June; on the contrary, they maintain high rating recommendations with a consensus upside of about 14% from the current price.
Against this backdrop, the correction that began in early June does not seem sustainable. Technically, the situation resembles what happened from August to October of last year. Moreover, the price has moved above the 100 EMA, indicating a possible local reversal of the downward trend.
The target price for TDG is $1465.