About TransDigm Group

It is safe to say that war is usually an ugly, soul wrenching, unfortunate occurrence. 

Nevertheless, war also tends to mean business and many businesses stand to gain plenty from the occurrence or even the slightest of hints of an upcoming war or the presence of heightened volatility in certain regions of the world.

As we have written previous stock analysis articles on companies that work closely with the United States government and employ their capabilities in serving its clients while also seeking out a profit, TransDigm is no exception, as it specializes in the manufacture and sale of essential, specifically engineered parts for military aircraft and has worked extensively with the Defense Department in the past, as it likely still does to this day.

Irrespective of one’s perceptions or opinions of war, having the ability to nab and maintain contracts with the United States government and entities thereof is far from a bad thing from a purely objective shareholder’s perspective.

Namely, these contracts tend to be long-term in nature and good for TransDigm’s (and other’s) reputation because, hey, if the United States government trusts TransDigm to provide it with exemplary, reliable products, what should stop anyone else from trusting the company?

Of course, there are many other positives that come with being a leader in the military aircraft parts space, such as being recession resistant given the nature of their work and those who they form contracts with, however these are the first couple that instantly came into our minds.

Now that you know a little bit about a military aircraft parts company that you might’ve never heard of before to begin with, it’s only right that we find our way into TransDigm’s financials in hopes of ultimately gathering whether or not this company’s stock is worth investing in for years to come.

TransDigm’s stock financials

TransDigm’s stock is expensive for the average, everyday retail investor, however, the main question is whether this company’s stock is overvalued or simply just expensive but worth its weight in value.

It appears as though the company’s stock is both expensive and overpriced.

For instance, TransDigm’s current price-to-earnings (P/E) ratio is a whopping 47.33, implying that the company’s stock is quite overvalued, as we have seen in previous stock analysis articles that it is commonly held that a P/E of 20 indicates that a stock is trading at fair value or what it is worth paying for, whereas a P/E above 20 implies that a stock is trading at a share price higher than what it is truly worth paying for, or in other words, simply overvalued.

As TransDigm’s stock (NYSE: TDG) presently maintains a P/E of more than double that of fair value, it is safe to say on our end that the intrinsic value of this company and its current share price have some catching up to do.

In addition to the company’s P/E ratio, we’d also like to briefly note that TransDigm is trading at a share price of around $631, providing the company a market capitalization of just north of $34 billion and doesn’t offer an annual dividend to its shareholders at the time of this publication.

This information is aimed at being purely informational and a brief means of providing some scale of TransDigm and its operational landscape.

Moving onto TransDigm’s balance sheet, the company has around $18.1 billion in total assets along with approximately $21.9 billion in total liabilities.

Although we were partly surprised by the total asset and total liability breakdown on TransDigm’s balance sheet, we get it.

Specifically, the aircraft manufacturing sector in general is tattered with lots of variable costs and although some companies dominate the space, such as Boeing and TransDigm, it is still a very competitive and expensive sandbox to play in.

Even though this is the case, we’d still like to see the company trim down some of its outstanding debt(s) and liabilities over the next handful of years in order to get closer to becoming total asset heavy at some point in the not-so-distant future, which in our eyes would further solidify the company’s financial and operating bases.

Onto the company’s income statement, TransDigm’s total revenue has stayed rather steady over the last handful of years. For example, the company’s total revenue was around $3.8 billion in 2018 and in the years that followed has remained in the $4 billion and $5 billion area code, reported as approximately $5.4 billion in late September 2022.

One of the interesting things about a company such as TransDigm is that we think it isn’t all that difficult to predict its revenue for the next one or two years. Of course, we could be wrong and we have no qualms in admitting that, but it also isn’t a secret that threats of war and other global societal conflicts as well as other festering tensions around the world are undoubtedly on the rise, which objectively bodes well for a company like TransDigm.

Given that this is the case, or at least it is what we perceive to be true, we think it is reasonable to expect TransDigm to report higher than normal revenues over the next few years, somewhere in the range of $5 billion to $7 billion.

According to TransDigm’s cash flow statement, the company’s net income has remained at elevated, consistent levels, which we are definitely happy to see. As a sort of reference, the company’s net income over the past five years has fluctuated between $681 million (2021) and $957 million (2018), which is a range that we are comfortable with and it also speaks to TransDigm’s ability to churn out a consistent amount of net income now and moving forward.

TransDigm’s stock fundamentals

As has historically been the case for many other aerospace defense giants, profitability is an undisputed strong suit.

TransDigm doesn’t appear to buck that trend in any way, shape or form.

Specifically, the company’s trailing twelve month (TTM) net profit margin is 15.95% compared to the industry’s average of -34.36%, which is obviously no small difference.

We attribute this positive discrepancy to TransDigm’s product mix and particularly its product specialization (airplane parts). We like it when companies stick to their craft or as the cool kids say nowadays, stay in their lane, as it allows them to further their focus on extracting value from their current product offerings, rather than expanding and getting too unfocused.

In addition to the company’s outsized TTM net profit margin relative to the average of its peers, TransDigm’s TTM returns on assets and investment are both nearly the exact same as the industry’s average, which is neither good nor bad.

Although we’d be thrilled if the company’s TTM returns on assets and investment were far greater than the industry’s averages, TransDigm’s aforementioned net profit margin gives us some added comfort in the company’s future ability to achieve core returns that will one day perhaps exceed that of its peers.

Should you buy TransDigm stock?

TransDigm is a large company with an overall solid financial framework, recession resistant business model with a seemingly long list of customers that through some way or another can afford (and frankly need) its products.

Unfortunately, the company’s stock is just plain overvalued at the moment and we are certainly not in the market for picking up shares in an established, low growth-oriented company at a premium during this stage of the economy.

Incorporating all of the data and information we have gathered and put forth in this stock analysis article, we deem that it is fair to give TransDigm’s stock a “hold” rating.

This article is proudly sponsored by Wee’s Cozy Kitchen, one of Austin’s premier Asian dining establishments!

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.