TransDigm Group Inc
TransDigm Group (NYSE: TDG) is a developer and manufacturer of military and commercial aerospace components. It has a substantial business in the aftermarket sales segment. In fact, it generates 55% of its revenues from that segment. The aftermarket segment is quite lucrative and provides steady cash flows.
In the case of TransDigm, the company is the only source for 80% of the parts that it sells. So, its customers tend to be quite sticky and recurring revenues are a common theme. The company’s defense customers, particularly, are high-margin accounts. TransDigm provides parts for military aircraft like the F-16 jets and the Apache AH-64 helicopters.
TransDigm’s strong business performance is reflected in the TransDigm share price, which has risen by more than 180% in the preceding 5 years before the pandemic hit the markets. During Q2 2020 earnings call, TransDigm CEO Kevin Stein said, “Year-to-date defense bookings have surpassed our expectations, driven primarily by a very robust defense OEM booking growth. Total defense bookings have solidly outpaced year-to-date sales.”
The defense industry businesses are generally considered to be quite resilient. The recent TransDigm news revealed the company’s acquisition of Esterline Technologies, which has substantial business in the aftermarket segment.
The recovery for TransDigm from the pandemic-led crash may not be as rapid as the recovery of other defense stocks. The primary reason for this lag is the fact that commercial planes are still grounded. Once air travel resumes, the demand for parts will increase. But, it will take time for grounded planes to return to the skies. However, in the long term, business is likely to bounce back.
TDG stock closed at $464.73 on 22nd June 2020, up more than 15% in the last month.