The pandemic has severely hit the airline industry. However, the pandemic has also led to higher demand among investors for defensive stocks. Businesses dealing in defense are among such “defensives”. The TransDigm group, even though classified as an aerospace components manufacturer, has a well-diversified business model. It earns revenues not only from selling components to aerospace majors, but it also earns revenues through maintenance contracts and the defense industry. TransDigm sells its components to defense customers to earn 30% of its total revenues. The defense spending is somewhat recession-resistant while maintenance contracts haven’t dried up during the pandemic either. This diversification makes TransDigm an interesting pick for investors looking to buy aerospace stocks.
TransDigm enjoys two important competitive advantages. The first one is the know-how. Aerospace components are high-value items and are subject to rigorous FAA and other certification requirements. Few firms can successfully pass such requirements. TransDigm also has developed intellectual property for its products which forms a formidable intangible asset.
Secondly, TransDigm’s components are mission-critical and therefore have high switching costs. It is not very easy for aerospace and defense majors to simply switch from TransDigm to a lower-cost competitor.
TransDigm has also successfully executed multiple acquisitions and integrated those businesses well into its setup. It has targeted smaller firms with strong moats that have allowed the company to double its revenues since 2015.
Some of the well-known aerospace stocks are Boeing, Lockheed Martin, General Dynamics, and TransDigm. Lockheed Martin is down 20% over the past year, Boeing is down 37%, General Dynamics is down 16%, while TransDigm is up 1.8%. On a 5-year basis, Lockheed Martin is up 56%, Boeing is up 64%, General Dynamics is up 20%, while TransDigm is up 180%. TransDigm is clearly the outperformer. However, while all the other stocks pay a dividend, TransDigm does not.