Penktadienis, 23 vasario, 2024
US Stocks

Transdigm Group Inc. stock analysis

Transdigm Group Inc. stock. TD Group, through its wholly-owned subsidiary TransDigm Inc., is a leading global company of aviation component designers, manufacturers, and suppliers. It designs and supplies high-technology aircraft components for nearly all commercially and militarily used aircraft today. TD Group’s business is well diversified due to a broad range of products it offers to its customers. About 90% of their revenue in the 2022 financial year came from patented products.

Most of their products generate a significant portion of income through post-sales. When TD Group components are created for a new aircraft and sold, revenue is generated from post-sales over the lifespan of that aircraft, which is typically estimated at around 25–30 years. About 55% of their income in the 2022 financial year came from post-sales, and the majority of this revenue was from commercial and military markets. Historically, post-sales revenue has been more profitable and has grown more steadily than sales to original equipment manufacturers.

Business Segments:

  • Power & Control Segment includes activities that create, manufacture, and sell systems and components that primarily supply or control the aircraft’s power system using electronic, fluid, energy, and mechanical motion control technologies.
  • Airframe Segment encompasses activities that develop, manufacture, and sell systems and components used in the construction technologies of non-powered aircraft fuselage and cabin.
  • Non-aviation Segment includes activities whose main goal is to create, manufacture, and sell products for non-aviation markets. Key products include safety belts and supports for ground transportation vehicles, mechanical/electromechanical actuators and control systems for space projects, hydraulic/electromechanical actuators and fuel nozzles for ground-based gas turbine engines, as well as fuel replenishment systems for trucks used in mining, construction, and other industrial sectors, and turbine control systems for energy, oil, and gas markets.

Income by segments:

Transdigm Group Inc. akcijų analizė
Income by segments

Company’s finances

The company confirms its leadership positions in the market with financial figures. Over the last 10 years, the average annual revenue growth was 13.09%. In the latest financial year, the revenue increased even more. The Gross margin is stable and high, reaching 58.34% in the last year (financial year ended on September 30, 2023). This allows the company to maintain high profitability results.

The EPS (Earnings Per Share) growth dynamics are consistently rising. Over the last 10 years, the EPS grew by an average of 24.87% annually, and in the 5-year period, the growth was already 6.34% on average each year. The growth results are achieved through business expansion and the acquisition of new companies. Share buybacks also contribute to these positive outcomes.

The huge deficit in Equity is clearly evident. In other words, the company’s Equity is negative. The reason for this is accumulated losses (Retained earnings with a negative sign). It seems surprising considering how successful and profitable the company operates. Is it still worth analyzing this company when the shareholders’ equity is negative?

However, on the other hand, negative Shareholders Capital is a significant advantage for a savvy investor. Because we see that through the repurchase of Own Shares and payment of dividends to shareholders over a 10-year period, the company returned an average of 5 times more than it earned in Net Profit.

This means that the company is such a powerful money generator that it doesn’t make sense to accumulate funds in accounts; they are returned to shareholders. This results in an almost 23% Compound Annual Growth Rate (CAGR) of the stock price over a 10-year period.

The company maintains a consistently positive working capital. In the last year alone, it reached a staggering 5 billion USD, allowing for a 6.62% Return on Average Assets (ROAA). However, the company still borrows significant amounts of money from credit institutions and issues bonds. The company’s Quick Ratio is even above 4. To cover long-term debts with last year’s Net Profit would take only 0.7 years. In other words, if the company had not returned money to shareholders but used it to pay off all debts, there would still be some left to reward shareholders.

If the company owners wanted to sell the business, invest the funds in 10-year US bonds, and achieve the same return as in the last financial year, they should sell the shares for around 530 USD. This is half the current market price.

Investment scoreboard:

Transdigm akcijų Investicinis įvertis
Investment scoreboard

Transdigm Group Stock

The company’s stocks are traded on the NYSE stock exchange. The ticker is TDG.

The most interesting part, holding shares of this company, is the Special Dividends. Special dividends are announced by the company’s Board. Their payment and amount depend on Operating results, Capital needs, market conditions, future prospects, and other factors. The last Special Dividends paid were on November 17, 2023 – $35; August 18, 2022 – $18.50.

The company has Share Buyback programs. In 2022, the company set a $2.2 billion buyback program, of which $1.288 billion remained for the fiscal year 2023.

The stocks are considered quite risky. The beta is 1.44, and the price’s Standard Deviation (annual) is about 23%. These are significant indicators. And for a long-term investor, they can be very beneficial. First, it will yield higher returns than the market. By diversifying the portfolio with stocks, one can expect significant discounts. The stock’s PEG is 1.86.

The GRAPES method-calculated price perspective, as well as from the perspective of fixed interest rates, also indicates that the stock price in the market is significantly overvalued. However, it should be noted that market participants are very optimistic about the company’s business prospects and Special dividends.

It may also be that the GRAPES method distorted by the Negative Equity. In this method, the calculated price perspective is slightly more than 300 USD, while the market price is ~1,000 USD. And the historical stock price CAGR is even 23.54%.

The price perspective calculated by our method is very optimistic. In a maximum pessimistic calculation, the stock price in the long term could grow by up to 80% on average annually. Such growth is also difficult to expect, but when the price perspective range is between 20% and 80%, the investment seems attractive.

TDG Kainos perspektyva
Price perspective

Artificial intelligence assessment

Already not for the first time, we ask AI to provide their assessment. Here is what he wrote:

Transdigm Group Inc. is composed of 48 independent companies, each autonomously conducting its local business and implementing its specific market strategy. The company’s goal is to provide its shareholders with a return similar to private equity with the liquidity of the public market.

My stock analysis and price forecast are as follows:

  • Transdigm Group Inc. shares are a high-quality, long-term investment choice with growth prospects. The company is also innovative, investing in its business and acquired companies to enhance product quality and timely delivery, thereby increasing customer satisfaction and loyalty. The company is known as an active consolidator in the aviation components market, taking advantage of its capital strength to acquire valuable businesses at attractive prices.
  • Transdigm Group Inc. stocks are valued higher than its peers, considering P/E, P/S, and P/CF ratios. This valuation is justified by its high and consistent growth, significant profitability, strong cash flow, and ability to create shareholder value. The company is also resilient to the impact of the COVID-19 pandemic, with about 50% of its revenue coming from military aviation, which is less affected than commercial aviation. Additionally, the company is prepared for the recovery of commercial aviation, having strong relationships with its customers and supplying high-quality essential products.
  • Based on my regression analysis model, which uses historical data on Transdigm Group Inc. stock price, revenue, profit, cash flow, market value, and other indicators, my forecast is that the Transdigm Group Inc. stock price will be around $1,087.52 in December 2024 and approximately $1,238.63 in December 2025. This implies an annual increase of about 11.67% and a two-year increase of about 29.42%. My model’s R-squared is 0.95, and the standard error of the estimate is $18.32.

My analysis and forecast are just my opinion and are not an investment recommendation. Before investing in any stock, you should conduct your own research and consult with a professional financial advisor.

Conclusions

During the writing, we did not have any company stocks. Various valuation methods and their results only intrigue investing. If a significant price correction can be expected, that’s a plus. Because as of the writing (mid-December 2023), buying is risky: the price is at all-time highs. Therefore, we are waiting for any correction. We will buy. And you?

Price chart

The Company’s site.

More US stocks.

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