We came across a bullish thesis on TransDigm Group Incorporated (TDG) on Substack by Bulls On Parade. In this article, we will summarize the bulls’ thesis on TDG. TransDigm Group Incorporated (TDG)’s share was trading at $1290.13 as of Feb 21st. TDG’s trailing and forward P/E were 45.48 and 33.78 respectively according to Yahoo Finance.
An engineer inspecting the assembly of an aircraft wing, intricately designed components in the background.
TransDigm (TDG) is one of the most dominant and overlooked aerospace suppliers, boasting an extraordinary economic moat. The company specializes in highly engineered aerospace components, such as valves, motors, pumps, and sensors, that are critical for aircraft safety and operations. These niche products require stringent regulatory approvals, creating significant barriers to entry and giving TransDigm remarkable pricing power. Due to the mission-critical nature of its parts and the high cost of switching suppliers, customers have little choice but to continue purchasing from TDG, allowing the company to steadily increase prices and generate substantial free cash flow.
The company’s crown jewel is its aftermarket business, which accounts for roughly 60% of sales and 90% of profits. Once a TDG component is installed on an aircraft, it remains the primary replacement option for decades due to FAA regulations and certification complexities. This creates a stable, recurring revenue stream, much like Amazon Web Services does for Amazon. TransDigm enjoys significant pricing leverage in this segment, with the ability to raise prices by an average of 5% annually, consistently outpacing inflation. Additionally, the company’s diverse product lineup—spanning tens of thousands of SKUs—ensures no single product dominates sales, reinforcing its resilience.
TransDigm benefits from long-term industry tailwinds, with air travel demand growing at a historical rate of 5–6% annually. Boeing projects similar growth over the next two decades, ensuring a steady increase in aftermarket demand. This predictable industry expansion, combined with TDG’s pricing power and high-margin aftermarket business, fuels exceptional profitability. The company’s EBITDA margins stand at around 45%, an incredible figure for a manufacturing business, and its return on tangible invested capital exceeds 90%, rivaling top-tier software firms.
A key factor in TDG’s success is its disciplined management team, led by co-founder and CEO Nick Howley. With a private equity-style approach, management focuses on acquiring sole-source aerospace suppliers, improving operational efficiencies, and driving margin expansion. Unlike traditional private equity firms, which flip companies after a few years, TDG retains its acquisitions long-term, extracting maximum value. Compensation structures are highly performance-based, ensuring that leadership remains laser-focused on EBITDA growth and shareholder returns. Over the past 15 years, this strategy has resulted in a staggering ~30% annual stock price appreciation.
With a business model that guarantees pricing power, high-margin recurring revenues, and a strong management team executing a disciplined growth strategy, TransDigm stands as one of the best compounders in the aerospace industry. Its combination of competitive advantages, market positioning, and financial strength makes it a quintessential long-term investment opportunity.
TransDigm Group Incorporated (TDG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 69 hedge fund portfolios held TDG at the end of the third quarter which was 71 in the previous quarter. While we acknowledge the risk and potential of TDG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TDG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.