TransDigm (TDG - News) continued to ride the commercial aircraft boom, and even got a lift from military sales, but anecdotal evidence that some airlines are trimming inventories raised concerns about the key aftermarket business.
Still, bookings are outpacing shipments, so the company is maintaining its outlook on the commercial aftermarket business, which sells replacement parts to carriers.
"We are watching trends here very closely," CEO W. Nicho las Howley said in a conference call.
Shares were little changed during the day, closing up 1.08 to 128.51.
Accelerating Profit Growth TransDigm earned $1.65 a share in Q2, up 70% from a year ago and 19 cents better than forecasts. It was the fourth straight quarter of accelerating growth.
The Cleveland-based maker of pumps, controls, actuators and other aircraft components generated revenue of $423.5 million, up 39% from a year earlier and above views for $390.8 million.
Due in part to acquisitions, the company lifted its full-year profit outlook to $6.23-$6.57 a share from its old view of $5.66-$6.00. It expects revenue of $1.67 billion-$1.7 billion, up from $1.47 billion-$1.51 billion.
Analysts see earnings of $6.13 a share on sales of $1.63 billion.
The military business also has been a positive surprise recently, despite concerns about Pentagon cuts. Parts sales for helicopters and the new F-35 Joint Strike Fighter have stood out, Howley said.
Excluding recent acquisitions, TransDigm predicts full-year sales percentage growth in the high teens for new parts. Defense sales are seen flat or modestly higher. Both forecasts are upgrades from the last quarter.
But the aftermarket growth outlook is unchanged at about 10%.
The aftermarket segment accounts for more than half of sales and has the fattest margins. The weakness in Europe, which is headed for another recession, could be contributing to thinner inventories.
Other factors are creating uncertainty in that business too, noted Michael Ciarmoli, an analyst at KeyBanc Capital Markets: Major carriers like American Airlines' parent AMR have declared bankruptcy.
Airlines are cutting capacity to keep flights fuller, and are upgrading fleets to reduce maintenance costs, he added. Some are keeping inventories lean to free up capital.
While fuel prices have moderated recently, they are still high.
Strong 2011 aftermarket sales will make comparisons tougher.
"It just seems there's a lot of risk to achieving stated growth plans this year," Ciarmoli said.
Commercial aftermarket sales have been flat sequentially for three quarters, Ciarmoli noted.
But more than 90% of sales are of proprietary parts, giving TransDigm more pricing power than other aerospace parts suppliers, potentially helping offset any weakness in volume.
Global airline traffic is rebounding from a downturn late last year. That should boost parts demand as aircraft are worked harder.
That, plus TransDigm's pricing power, makes the question about airlines' inventories less of an issue, said R. Rama Bondada, an analyst at RBC Capital Markets.
"As long as traffic is chugging along, I don't think it's much of a concern," he said.