TransDigm (TDG) Q2 Earnings Report: What's in the Cards?

TransDigm Group Incorporated TDG is slated to report second-quarter fiscal 2017 results, before the opening bell on May 9.

TransDigm has a decent earnings surprise history, having beaten estimates each time over the trailing four quarters, for an average positive surprise of 6.6%. Last quarter, the company posted a positive earnings surprise of 7.9%.

Let's see how things are shaping up for this announcement.

Factors to Consider

TransDigm designs, produces and supplies highly engineered proprietary aerospace components and certain systems/subsystems. In fact, about 90% of its sales are generated by proprietary products, that is, products for which the company owns the intellectual property. This translates into consistent revenue generation capacity through all phases of the aerospace cycle. We believe that the company’s fiscal second-quarter results will benefit from its robust proprietary sales.

Also, we perceive that stable aftermarkets, which have historically produced higher gross margins, will be one of the key profit drivers this earnings season. TransDigm is also enjoying strong momentum in commercial aftermarket sales, which would likely reflect in the upcoming results as well.

This apart, the company has been consistently strengthening its highly-engineered proprietary aerospace business with strategic acquisitions. In the first-quarter fiscal 2017 results, TransDigm had posted an impressive 16% year-over-year increase in the top line, as its accretive acquisitions contributed $88 million to sales and organic growth boosted revenues. TransDigm’s acquired businesses will likely continue being solid growth drivers in the coming times.

Transdigm Group Incorporated Price, Consensus and EPS Surprise

 

Transdigm Group Incorporated Price, Consensus and EPS Surprise | Transdigm Group Incorporated Quote

During the quarter under review, TransDigm acquired SCHROTH Safety Products GmbH, and aviation & defense assets & liabilities of Takata Corporation for $90 million. Given that SCHROTH has a growing after-market presence on attractive high use platforms, TransDigm believes it will contribute significantly toward its core business.

The company’s stable aftermarkets, which have historically produced higher gross margins, will continue to drive financial performance and boost the upcoming quarterly results.

Despite these positives, TransDigm is seeing some negative trends at present, like weaker defense aftermarket orders and soft business jet, helicopter and freighter revenues, which might strain its top-line growth in the fiscal second-quarter results.

This apart, in recent times the company has attracted much bearish attention on account of allegations of unfair business practices. It is currently awaiting a government investigation on the soundness of its business health.

Consequently, over the past six months, TransDigm’s shares have recorded a negative return of 7.5%, in stark contrast to the Zacks categorized Aerospace/Defense Equipment industry’s positive average return of 12.7%. The ailing stock is likely to take further beating if the company fails to secure a clean chit from the U.S. Department of Defense.

In addition, softness in global macroeconomic conditions is affecting air travel, adding to the company’s woes. Furthermore, reduction in number of flight hours of customers can thwart the company’s growth momentum. The company has some concerns about the commercial transport industry in the coming times as well. This could hamper the company’s numbers in the upcoming results.

Earnings Whispers

Our proven model does not conclusively show that TransDigm will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: The Earnings ESP for TransDigm is currently pegged at 0.70%. This is because the Most Accurate estimate of $2.87 is higher than the Zacks Consensus Estimate of $2.85.

Zacks Rank: TransDigm currently has a Zacks Rank #4 (Sell). Though the company’s positive ESP hints at an earnings beat, its rank makes surprise prediction inconclusive.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The RMR Group Inc. RMR, scheduled to release its results on May 10, has an Earnings ESP of +2.27% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Global Partners L.P. GLP has an Earnings ESP of +233.33% and sports a Zacks Rank #1. The partnership is anticipated to release earnings on May 9.

Pattern Energy Group Inc. PEGI has an Earnings ESP of +250.00% and has a Zacks Rank #3. The company is scheduled to report its quarterly earnings report on May 9.

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