Earnings Hindsight: TransDigm Group

Note you can get the basics on the quarter here, but I had to say a few words about this magnificent beast here on my own site as well.

TransDigm Group 4Q 2023

• EPS: $8.03 vs $7.53 estimate

• Revenue: $1.85 billion vs $1.83 billion

• EPS F24 Guidance: $31 to $32.94 vs. $31.15 consensus

• Revenue F24 Guidance: $7.48B to $7.68B vs. $7.4B consensus

• Special dividend: $35/share

Key quote: “We believe we are unique in the industry in both the consistency of our strategy in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. … We follow a consistent long-term strategy, specifically. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocation are a key part of our value-creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market.” -- CEO Kevin Stein (emphasis mine)

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Why we should have seen this coming: When the guys at Chit Chat Money invited me on over the summer, I was a little anxious over what company to pick to talk about. After all, the Internet never forgets. I wanted to pick a stock I wouldn’t mind being associated with a decade from now.

We talked about TransDigm, and anyone who listened to that podcast should not have been surprised by these results. TransDigm is the top operator in its field, with a long track record of delivering software-like margins from seemingly mundane parts businesses. I’ve been listening through most of my career to various reasons why this isn’t sustainable. Yet here we are. 

EBITDA margin stood at 52% for the quarter. Commercial aftermarket (spare parts) sales grew by 27%. Military was up 15%. They even found an acquisition, announcing plans to buy the Electron Device business of CPI for $1.385 billion in cash. The target looks textbook TransDigm, with 70% of its sales coming from the aftermarket and substantially all revenue from what they call “proprietary” products. The formula remains the same: “Rare and necessary” leads to high margins. If Delta needs your part to complete a flight, the airline isn’t really price sensitive about what that part costs.

How to think: The one thing I didn’t see coming was the dividend. TransDigm operates a private equity-like model, which means a lot of debt. $19.892 billion worth at the end of the quarter, to be precise. Little of it matures before 2026, but with rates on the rise my assumption was any cash not used for acquisitions would go towards the debt pile. 

The choice to return cash to shareholders indicates to me that management is even more confident about the business than I am.

This is not to say you should run out and buy TransDigm. I personally am not (I generally don’t add to top 10 holdings, though I will accept the dividend in shares through the reinvestment program). And to be fully transparent my cost basis is well below today’s trading price.

But back to my internal debate when Chit Chat came calling, TransDigm continues to be front of mind when someone asks me about companies that fit my desired style of investing.

As I’ve said before, may they all go as TransDigm…

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