TransDigm's (TDG) Q1 Earnings Impressive, Revenues Beat

TransDigm Group Incorporated TDG reported first-quarter fiscal 2018 adjusted earnings of $5.58 per share, which reflected growth of a whopping 121.4% year over year. The bottom line gained from the favorable impact of the recent tax reforms.

Decent top-line growth and improvements in the operating margin also drove earnings. In addition, continued efforts to boost productivity, lower refinancing costs as well as lower acquisition-related costs proved conducive to earnings growth. This was partially offset by higher interest outlay.

Inside the Headlines

Net sales for the reported quarter amounted to $848 million, reflecting year-over-year growth of 4.2%. However, the top line missed the Zacks Consensus Estimate of $862 million.

Decent growth in Commercial Aftermarket (up 10% year over year) revenues supplemented the top-line performance. Furthermore, contributions from the previously-completed acquisitions boosted the overall sales performance during the fiscal first quarter. TransDigm’s commercial aftermarket transport business witnessed solid year-over-year revenue growth. However, Defense and Commercial OEM remained flat year over year.

TransDigm’s EBITDA (earnings before interest, taxes, depreciation and amortization) grew 18.4% year over year to $382.5 million.

Transdigm Group Incorporated Price, Consensus and EPS Surprise

During fiscal 2017, TransDigm had announced the acquisition of three add-on aerospace product lines, for a total consideration of roughly $100 million. These product lines mainly comprise proprietary, sole-source products with significant aftermarket content. The product lines are in sync with the company’s long-term plan and highlight its strategy to acquire proprietary aerospace businesses with significant aftermarket content, in a bid to fortify its core business.

The acquired business lines have combined revenues of about $32 million and will be consolidated into TransDigm’s existing businesses. The company financed the acquisitions through existing cash on hand.

These acquisitions will add to TransDigm’s product range with the proprietary products which enjoy strong positions on high use of platforms, robust aftermarket content and an excellent reputation. Products offered include highly engineered aerospace controls, quick disconnect couplings, as well as communication electronics.

Liquidity

TransDigm ended the fiscal first quarter with cash and cash equivalents of $857.9 million, up from $650.6 million as of Sep 30, 2017. At the end of the reported quarter, the company’s long-term debt was $11.4 billion, nearly flat compared with the figure recorded at the end of September 2017.

Fiscal 2018 Guidance

Concurrent with the fiscal first-quarter results, the company reiterated its revenue outlook and revised its earnings guidance for fiscal 2018, to incorporate the new tax regulations. Adjusted earnings per share are now forecast to be in the band of $16.95-$17.59 per share, in comparison to the earlier guided range of $12.78-$13.42 per share. The company had generated earnings of $12.38 per share in fiscal 2017.

Sales are expected to lie in the range of $3,645-$3,725 million (compared with $3,504 million reported in fiscal 2017). The fiscal 2018 guidance assumes that commercial aftermarket and OEM revenues will grow in the mid-single-digit percentage range, while defense revenues will be up in the low- to mid-single-digit percentage range.

Estimated net income from continuing operations lies in the band of $906-$942 million, up from the earlier projection of $702-$738 million, while EBITDA is likely to be in the range of $1,805-$1,855 million.

Our Take

TransDigm’s thriving commercial aftermarket business proved to be a strong growth driver for its fiscal first-quarter results. The aftermarket business comprises 55% of sales, but typically makes up more than 75% of the company’s EBITDA. This translates into consistent revenue-generation capacity through all phases of the aerospace cycle. The aftermarket business is expanding as majority of aircraft bought during the financial crisis is beginning to age, and requires more frequent and comprehensive servicing.

We believe stable aftermarkets, which have historically produced higher gross margins, will continue to drive financial performance for the upcoming quarters.

However, softness in business jet, helicopter and freighter revenues, have been hurting the company’s profits. In addition to this, weakness in the global macroeconomic conditions is affecting air travel, adding to the company’s woes. The company is concerned about the commercial transport industry for the coming times as well. These factors can play spoilsport for this Zacks Rank #3 (Hold) company in the near term.

Stocks to Consider

Some better-ranked stocks in the industry include Spirit Aerosystems Holdings, Inc. SPR, Raytheon Company RTN and Teledyne Technologies Incorporated TDY. While Spirit Aerosystems sports a Zacks Rank #1 (Strong Buy), Raytheon and Teledyne carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Spirit Aerosystems surpassed earnings estimates twice in the trailing four quarters, resulting in an average surprise of 9.8%.

Raytheon has managed to beat estimates each time over the preceding four quarters, for a positive earnings surprise of 6.4%.

Teledyne Technologies has a positive average earnings surprise of 35.4% for same time period, beating estimates strongly all through.

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