TransDigm Group Incorporated (TDG), Aerosonic Corporation (AIM): This Company Is Well Positioned and Is Making Smart, Accretive Acquisitions

Aerospace companies

TransDigm is a key supplier to The Boeing Company (NYSE:BA) and Airbus, the two major global commercial aircraft manufacturers. This portion of the business is the key driver going forward with U.S. Defense budget under pressure. Both The Boeing Company (NYSE:BA)’s 787 Dreamliner and the Airbus A380 will play roles in OEM sales at TransDigm. In addition, aftermarket parts for the popular The Boeing Company (NYSE:BA)737s and Airbus A320s will help margins at TransDigm and contribute to greater sales stability. If TransDigm could receive a larger sliver of The Boeing Company (NYSE:BA)’s $81.2 billion in revenue, it would be sitting well.

In this chart, note the differences in multiples for TransDigm versus The Boeing Company (NYSE:BA), which has a higher percentage of OE sales and BAE Systems PLC (ADR) (OTCMKTS:BAESY), which has a larger percentage from defense. Companies with greater earnings predictability over a cycle and consistent revenue command higher multiples. BAE Systems PLC (ADR) (OTCMKTS:BAESY) has a 4% ROA even with the safety of holding over $5 billion in cash. That is a lot of cash for a $20 billion market cap. It is up 44% in the last 52 weeks.

Conclusion

There are a lot of reasons to like TransDigm. It participates in a growth trend of increasing airline passenger traffic, focuses on the higher margin, more consistent aftermarket portion, and keeps making logical, accretive acquisitions. However, the multiple does reflect a lot of this. It is a stock worth watching and potentially reassessing on pullbacks in the share price.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Company Is Well Positioned and Is Making Smart, Accretive Acquisitions originally appeared on Fool.com is written by Mike Thiessen.

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