The end of 2018 called a lot of things into question for investors, including how much longer the bull market in stocks could push forward. That made people look more closely even at some of the most successful parts of the economy, and in the aerospace field, aircraft component and systems supplier TransDigm Group (NYSE: TDG) has been a huge positive performer as demand for planes has shot through the roof over the past decade.
Coming into Tuesday's fiscal first-quarter financial report, TransDigm investors had high hopes that the company would continue to display the upward momentum it enjoyed throughout nearly all of last year. TransDigm's results were stronger than many had expected, and 2019 now looks like the company is cleared for takeoff with even better prospects for growth.
Image source: TransDigm Group.
TransDigm throttles up
TransDigm Group's fiscal first-quarter results got 2019 off to a strong start. Revenue growth of 17% sent sales to $993.3 million, accelerating from its pace of growth three months ago and easily topping the 12% gains most had expected to see. Adjusted net income was down 30% from year-ago levels to $216.3 million, mostly due to tax-reform elements that boosted the prior year's results. Adjusted earnings of $3.85 per share crushed the consensus forecast among investors for just $3.38 per share on the bottom line.
All of TransDigm's key segments did reasonably well. The commercial original equipment manufacturing segment enjoyed a 13% boost to segment sales, continuing to return to normal levels after a tough spell during the summer months in 2018. Commercial aftermarket sales growth lagged behind somewhat at just 6%, but the defense unit saw the best growth in the company, with revenue for the segment climbing 15% from year-earlier levels.
TransDigm saw encouraging signs elsewhere as well. Gross margin climbed more than half a percentage point as proprietary product sales and productivity improvements helped to offset the negative impact of acquisition costs on margins. Interest expenses were slightly higher, but pre-tax operating income was more than 30% higher over the period, and lower overhead expenses helped to boost operating margin by more than two and a half percentage points.
CEO Kevin Stein was happy with how things went. "Total revenue ran ahead of our expectations," Stein said, "and bookings, or income orders, outpaced revenue in all major market channels." The CEO pointed to its "relentless focus on our proven operating strategy" as a key driver of value for TransDigm.
What's ahead for TransDigm?
Massive transformation is coming at TransDigm. The October announcement of the purchase of Esterline Technologies (NYSE: ESL) promises to boost TransDigm's scope in some key aerospace niches, and the $4 billion deal is seen closing as soon as March.
TransDigm took the opportunity to boost its outlook for the full 2019 fiscal year. Revenue got a $20 million boost to a new range of $4.145 billion to $4.235 billion, and adjusted earnings of $16.42 to $17.10 per share is higher by a full $0.50 per share compared to what the company expected three months ago.
Just about the only potential cloud on the horizon is that TransDigm kept its segment projections unchanged for the year, and that could signal an expected cyclical downturn in aerospace over the long run. Even though the company still sees the defense and commercial aftermarket segments producing mid- to high-single-digit percentage growth in fiscal 2019 compared to last year, TransDigm believes the commercial OEM segment will manage only low to mid-single-digit percentage increases this year. That's not horrible in itself, but it seems to recognize that the huge growth rates aircraft manufacturers have enjoyed aren't sustainable forever.
TransDigm shareholders were ecstatic about the news, and the stock climbed 5% in the first half-hour of trading following the announcement. As long as the aerospace industry keeps moving forward, TransDigm Group has positioned itself to take full advantage of the growth opportunities in the space for the foreseeable future.
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