TDG - Valens Credit Report - 2019 06 19
Cash bond markets are materially overstating TDG's credit risk with a YTW of 6.299%, relative to an Intrinsic YTW of 4.539%, while CDS markets are slightly understating risk with a CDS of 166bps, relative to an Intrinsic CDS of 227bps. Meanwhile, Moody's is overstating the firm's fundamental credit risk, with their high-yield Ba2 credit rating three notches lower than Valens' IG4 (Baa2) credit rating.TDG's cash flows should comfortably exceed operating obligations in each year going forward. Moreover, the combination of the firm's cash flows and healthy liquidity levels should allow them to navigate all obligations including debt maturities through 2025, including consecutive $3.0bn+ debt headwalls in 2023, 2024, and 2025. Additionally, despite a non-existent recovery rate, the firm's sizeable market capitalization and robust Uniform ROA levels should allow access to credit markets to refinance, if necessary.
Incentives Dictate Behaviorâ„¢ analysis highlights that management members are not well compensated in a change-in-control scenario, limiting event risk for creditors.
Earnings Call Forensicsâ„¢ of the firm's Q2 2019 earnings call (5/7) highlights that management generated an excitement marker when saying they are willing to divest Esterline assets that do not fit their focus, when it is time to do so. In addition, they are confident in their projected year-end cash balance.
TDG currently trades near historical highs relative to UAFRS-based (Uniform) Earnings, with a 22.2x Uniform P/E. However, even at these levels, the market is pricing in expectations for Uniform ROA to decline from 61% in 2018 to 31% in 2023, accompanied by 16% Uniform Asset growth going forward.
TransDigm Group is a holding company. Through its subsidiaries, the company designs, produces and supplies aircraft components for use on commercial and military aircraft. The company's segments are: Power and Control, which develops, produces and markets systems and components that provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies; Airframe, which develops, produces and markets systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies; and Non-aviation, which develops, produces and markets products for non-aviation markets.
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