On Sep 25, 2013, we downgraded aircraft components maker,
TransDigm Group Incorporated
), to Underperform based on the company's debt burden, higher
interest expense and lowered net income and earnings
Why the Downgrade?
Estimates for TransDigm, which focuses on the aerospace
industry, have been declining ever since it reported third
quarter results on Aug 7. TransDigm's third quarter revenues as
well as Non-GAAP earnings of $488.6 million and $1.89 per share
surpassed the Zacks Consensus Estimates of $486 million and
However, GAAP net income came in at $76.7 million, down 15.2%
year over year. GAAP earnings were 71 cents per share, down 57.7%
from $1.68 in the prior-year quarter. The reduction in
year-over-year earnings was mainly due to non-cash compensation
cost related to the accelerated vesting of 2.4 million stock
options and higher interest payments.
Further, due to the additional interest burden related to $1.4
billion of new debt raised, TransDigm has lowered its earnings
guidance. EPS is expected to be in the range of $2.28 to $2.40
per share (down from the previously guided range of $5.29 to
$5.51) due to increase in the number of outstanding shares in the
next quarter. Adjusted earnings per share are expected to be in
the range of $6.74 to $6.86, down from $6.83 to $7.05 projected
Following the release of the third quarter results, the Zacks
Consensus Estimate for 2013 has gone down significantly by 55% to
$2.42 per share. The Zacks Consensus Estimate for 2014 has also
declined 5.4% to $6.89 per share. In addition, fourth quarter
estimates were down from earnings of $1.77 a share to a loss of
16 cents a share.
With the Zacks Consensus Estimates for the fourth quarter of
2013, 2013 and 2014 going down, the company now has a Zacks #4
Cause for Concern
On Jul 5, the board of directors of TransDigm approved a
special dividend of $22 per share, which was a robust increase of
almost 71.2% from its last payout of $12.85 - a special dividend
paid last November. In order to fund this payout, the company had
raised $1.4 billion in July, which further pressurized its
interest expense that was already high.
Further, with about three to four acquisitions on board, it
might take some time for TransDigm to properly integrate them
into its existing business. Thus, the acquisitions may not be
Thus, the company mentioned that its bottom line might get
affected because of this high expense.
Aerospace Stocks That Warrant a Look
While we prefer to avoid TransDigm until we see signs of
improvement in the company's performance, other aerospace stocks
worth a look are
Alliant Tech Systems Inc.
Elbit Systems, Ltd.
). Both are Zacks #1 Rank (Strong Buy) stocks.
) is also worth considering given its Zacks Rank #2 (Buy).
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TRANSDIGM GROUP (TDG): Free Stock Analysis
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