EUR 850.00 For Business Accounts Only

Morningstar | TransDigm Closes out a Solid Fiscal 2018; Investors Look Ahead to Esterline Deal Close in 2019

TransDigm manufactures products for electronic, fluid, power, and motion control onboard aircraft. It also supplies products used for cabin structures, lighting, laminates, pallets, and a host of other applications. The B737, B777, B787, A320, and A330/340 aircraft account for a combined 30% of sales. In the defense business, aircraft include the A400M and C-130. TransDigm's business reflects its private equity roots--the company had its initial public offering in 2006--and its units operate autonomously from corporate headquarters. TransDigm also uses significant financial leverage, relying on a stream of aftermarket business to generate predictable cash flows. Management is a serial acquirer, aiming to improve operations at acquired firms and optimize the capital structure, while concomitantly optimizing pricing on spare and repair parts.TransDigm's wide moat rests on switching costs and intangible assets. Its aerospace products go through a rigorous Federal Aviation Administration certification process. Aftermarket sales, which account for over 75% of profits, are sticky. TransDigm enjoys the highest margins of any aerospace company we cover, translating into impressive returns on invested capital. It reports financials through power & control and airframe segments but in practice manages its business through 32 units. For fiscal 2017, the firm generated roughly 70% of sales from commercial customers--airlines and parts distributors (38% of commercial sales) and aircraft manufacturers (32% of commercial sales) for equipment sales. Just over 30% of total sales comes from defense customers, but this percentage is growing.TransDigm recently announced plans to acquire Esterline for $4 billion in a deal that will add $2 billion of revenue to TransDigm's top line. Although Esterline has some nice proprietary technologies and sole-source positions on aircraft, its operations are suboptimized and TransDigm will need several years to extract synergies and efficiencies out of the company. Overall, we think the deal is a positive strategically but value-neutral. We continue to think long-term investors will be well served holding TransDigm shares.