TransDigm Group (TDG): An In-Depth Analysis of its Modest Overvaluation
TransDigm Group Inc (NYSE:TDG) experienced a daily gain of 1.65%, and a three-month gain of 16.57%. The company's Earnings Per Share (EPS) stands at 18.77. However, the question arises: is the stock modestly overvalued? This article aims to answer this question through a comprehensive valuation analysis. Continue reading for an in-depth understanding of TransDigm Group's value.
Company Introduction
TransDigm Group Inc. is a leading manufacturer and service provider for a diverse set of components and parts for commercial and military aircraft. The company operates in three segments: power and control, airframes, and a small nonaviation segment serving mainly off-road vehicles and mining equipment. TransDigm Group's market cap is $50.10 billion, with a stock price of $908.33 per share, suggesting a modest overvaluation compared to the GF Value of $819.41.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
TransDigm Group's stock is estimated to be modestly overvalued based on the GuruFocus Value calculation. As a result, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before deciding to purchase shares. TransDigm Group has a cash-to-debt ratio of 0.16, ranking worse than 75.78% of 289 companies in the Aerospace & Defense industry. The overall financial strength of TransDigm Group is 3 out of 10, indicating poor financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. TransDigm Group has been profitable 10 times over the past 10 years. The company's profitability ranks 9 out of 10, indicating strong profitability.
However, growth is a crucial factor in a company's valuation. TransDigm Group's 3-year average annual revenue growth is 0.2%, ranking worse than 57.09% of 261 companies in the Aerospace & Defense industry.
ROIC vs WACC
Comparing a company's return on invested capital to the weighted average cost of capital can determine its profitability. For the past 12 months, TransDigm Group's return on invested capital (ROIC) is 13.87, and its cost of capital is 9.2. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders.
Conclusion
In conclusion, the stock of TransDigm Group (NYSE:TDG) is estimated to be modestly overvalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks better than 53.74% of 227 companies in the Aerospace & Defense industry. To learn more about TransDigm Group stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
