TransDigm Group Stock Rises As Buyouts Are Paying Off


TransDigm Group ( TDG ) has long used acquisitions as a way of building its lineup of aircraft parts, systems and technologies.

But over the last year or so the company has stepped up its buyout pace with a series of big and small deals that have added everything from temperature systems and flight test equipment to air bags, seat belts and lavatory flooring.

Since August 2011, TransDigm has spent more than $1.1 billion on four buyouts.

The latest came in September, when the company dished out $35 million to acquire Aero-Instruments, a Cleveland-based supplier of air data sensors, flight test equipment and other gear.

The biggest deal, which closed in February, was TransDigm's buy of Phoenix-based AmSafe Global Holdings for $750 million. AmSafe is best known for its proprietary aviation passenger seat belts and air bags. Its products are installed on more than 90% of the aircraft produced globally.

The AmSafe acquisition was a particularly expensive one for TransDigm, which didn't pass the $1 billion mark in annual revenue until fiscal year 2011.

Leading Position

Still, it's the kind of deal that has helped TransDigm establish a leading position in many aircraft parts markets, watchers say.

Moreover, AmSafe has a leading position in its niche market. In a recent report, Zacks Equity Research noted that AmSafe "is the only company to have a seat belt air bag system installed worldwide on both commercial transport and general aviation aircraft."

That same report also praised the Aero-Instruments deal. Zacks called Aero "a strategic fit for TransDigm," citing the fact that 56% of Aero's net sales come from the aftermarket, mainly from the commercial and military sectors.

Similarly, TransDigm gets 60% its sales from the aftermarket, which is more stable in downturns than other industry sectors and offers higher margins. In addition to the Aero and AmSafe deals, TransDigm's other acquisitions over the past 15 months include its $288.5 million buyout of Schneller Holdings, a manufacturer of laminates, thermoplastics and non-textile flooring for use on aircraft; and its $84 million buyout of aircraft components maker Harco Laboratories.

Most of the firms TransDigm acquires continue to operate under their own brand names. The company lists 23 brand names on its website.

About 90% of TransDigm's products are proprietary. The company is the sole source provider for about 75% of its sales.

Although TransDigm has been a consistent acquirer through the years, questions have been raised recently about whether it will continue its rapid buyout pace in coming months.

Those questions are based on the company's Oct. 3 announcement that it is considering paying a cash dividend of $400 million to $850 million to shareholders on or before Dec. 31.

"The special dividend the company is considering is good news for shareholders, but we see this as a sign that the M&A pipeline is less robust," JPMorgan analyst Joseph B. Nadol noted in a report.

Updated Guidance

On the same day TransDigm announced the dividend, it also provided updated guidance for fiscal year 2012, which ended in September; and fiscal year 2013.

The company is due to report fourth-quarter and full-year earnings in mid-November. It reaffirmed its fiscal 2012 sales of about $1.7 billion.

However, certain aspects of TransDigm's fiscal 2013 guidance were on the low side, analysts say.

"FY13 sales guidance points to organic growth of 3% to 4%, which compares unfavorably to the 7% to 8% we had expected," Nadol noted. "We believe consensus expectations had been close to ours."

He added that the expected commercial aftermarket growth of 5% to 10% "was modestly weaker" than his own 10% forecast.

"The takeaway here is that the aftermarket outlook is not improving much from the second quarter, when TransDigm generated 6% pro forma growth," Nadol noted. "We would expect the company to capture 5% to 10% from price increases alone, so the guidance implies minimal volume expansion is expected."

Extended Uptick

Still, the news hasn't had much ill effect on TransDigm's stock price. The company's shares have been on an extended uptick and recently hit a record high of 152.62.

Financially, TransDigm has run off eight straight quarters of double-digit sales and earnings gains.

The company earned $1.88 a share during its fiscal third quarter, which ended in June. That was up 55% from the prior year and 18 cents above Wall Street views. Revenue gained 42% to $461.7 million, topping estimates for $452 million.

Much of the sales growth was driven by contributions from acquired companies. On the downside, those buyouts also caused margins to fall.

"The gross margin fell 140 basis points from last year to 54.9%," noted J.B. Groh, analyst at DA Davidson & Co. "Lower year-over-year margins were impacted by the inclusion of acquired businesses that had about a 200-basis-point negative impact."

Analysts polled by Thomson Reuters expect TransDigm to report fiscal fourth-quarter earnings of $1.76 a share, up 21% from the prior year. Full-year profit is seen rising 50% to $6.71.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: TDG

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