We recently compiled a list of the 11 Best Aerospace and Defense Stocks to Buy Right Now. In this article, we are going to take a look at where TransDigm Group Incorporated (NYSE:TDG) stands against the other best aerospace and defense stocks to buy.
How Did The Aerospace And Defense Sector Perform in Q3 2024?
According to a report by Dinan Capital Advisors, the aerospace and defense industry’s EBITDA multiples increased by around 8% on average during the third quarter of 2024. Within the industry, the Maintenance, Repair, and Overhaul (MRO) segment stood out with the highest EBITDA multiple of more than 19%. The robust performance in the sector was driven by increased government spending, AI defense implementation, and increased global travel. As per the report, the global market size of the aerospace and defense sector is estimated to grow from $1 trillion to around $1.5 trillion during the next decade.
There are various factors contributing to growth within the industry. Firstly, the defense sector is experiencing significant expansion due to the ongoing conflicts in the Middle East and Ukraine. This rising defense demand resulted in a record defense order backlog of $747 billion, indicating an 11% increase year-over-year. Moreover, the Senate Armed Services Committee has projected that Congress will finalize the FY25 US defense budget at approximately $833 billion, exceeding last year’s spending limits.
In addition to increased defense spending, which is one segment of the overall aerospace and defense industry, international air traveling is also improving. According to a report by FlightGlobal, the global passenger traffic grew by 7.4% subsequently during the third quarter. Although the profitability of the global airline industry is still down by around $1.7 billion year-over-year, the subsequent growth in passengers indicates an ongoing recovery.
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Mitchell Reiss, American diplomat and distinguished fellow at the Royal United Services Institute appeared on a CNBC interview on November 7 to discuss how the defense sector will perform under President-elect Donald Trump. He said that the United States government is expected to increase its defense spending under President Donald Trump. Currently, defense spending is at its lowest level since 1998 and the geopolitical situation is more dangerous than the said year. Reiss thinks that the president will double down on some of the initiatives from his first term. Trump sees China as a United States adversary and he sees Israel and Saudi Arabia as stabilizing forces in the Middle East and will want to build upon the Abraham Accords. He also thinks that the president will call upon its European allies to increase defense spending.
While Reiss expects the United States’ defense spending to increase, he also noted that a third of the NATO countries are still not hitting the 2% mark in terms of their defense spending. Considering the geopolitical tensions between Russia and Ukraine, European countries would also naturally pivot towards increasing their defense spending. Reiss believes that if someone is interested in defense stocks there is a lot of growth potential within the industry.
An aerial view of an aircraft factory, showing a flurry of activity on the factory floor.
Our Methodology
To curate the list of the 11 best aerospace and defense stocks to buy right now, we used the Finviz stock screener. Using the screener we aggregated a list of companies working in the aerospace and defense industry and sorted them by market capitalization. Next, we sourced the number of hedge funds holding each company from Insider Monkey’s Q3 2024 database. The list is ranked in ascending order of the number of hedge funds.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
TransDigm Group Incorporated (NYSE:TDG)
Number of Hedge Fund Holders: 71
TransDigm Group Incorporated (NYSE:TDG) is a company that designs, produces, and supplies specialized parts for aircraft. These parts are essential for both commercial and military airplanes. It specializes in highly engineered components which are sold as replacement (aftermarket) parts and to Original Equipment Manufacturers (OEMs).
One of the key competitive edges of the company comes from its range of proprietary aerospace components which are mainly sold in the aftermarket. Management has shifted its focus to the aftermarket segment as it generates more margins, as a result around 90% of its net sales for fiscal 2023 came from this segment.
In addition, TransDigm Group Incorporated (NYSE:TDG) has also been concentrating on expanding its proprietary product portfolio and has taken some bold steps toward this goal. For instance, management acquired SEI Industries and CPI Electron Device Business during the current fiscal year. Both companies have a line-up of specialized products catering to the aerospace and defense sectors.
During the fiscal third quarter of 2024, the company surpassed its revenue guidance by posting $2.05 billion, up 17.3% year-over-year. Its net income was also encouraging and improved by 31% during the same time to reach $461 million. Management has also revised its full-year EBITDA guidance from $3,995 million to $4,095 million to an updated range of $4,100 million to $4,160 million. It is one of the best aerospace and defense stocks to buy right now.
Mar Vista Strategic Growth Strategy stated the following regarding TransDigm Group Incorporated (NYSE:TDG) in its Q3 2024 investor letter:
“TransDigm Group Incorporated (NYSE:TDG) reported another earnings beat-and-raise during its fiscal third quarter as it continues to benefit from a surge in global travel, surpassing pre-pandemic levels. The airlines posted no significant change in aircraft order or delivery patterns despite overcapacity issues. Both Boeing and Airbus remain in a holding pattern on producing and delivering new units due to manufacturing quality and labor issues (strike) in the case of Boeing and supply chain challenges in the case of Airbus. This plays directly into the hands of TransDigm’s most profitable business, commercial aerospace aftermarket, as load factors remain high, and take-offs and landings continue to grow beyond pre-pandemic levels. Moreover, the company announced a significant special dividend to be paid in October 2024. Even with this payment, TransDigm has over $5.5 billion of capital to execute its acquisition strategy in what should be a robust M&A market in 2025.”
Overall, TDG ranks 3rd on our list of best aerospace and defense stocks to buy right now. While we acknowledge the potential of TDG to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. 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 is originally published at Insider Monkey.
