On May 22, 2014, we issued an updated research report on TransDigm Group Inc. (TDG). The company reported strong second-quarter fiscal 2014 results, with both earnings and revenues surpassing estimates. The company also announced its plans to amend the senior secured credit facilities and is considering paying a special dividend in an effort to enhance shareholders’ value.
TransDigm Group has delivered positive earnings surprises in three of the last four quarters, with an average beat of 37.9%. Second-quarter results were driven by the company’s strategic acquisitions in fiscal 2013, improving commercial aftermarket and strength in commercial aerospace as well as the continuing improvement in the commercial original equipment manufacturing (:OEM) business. However, earnings were partially offset by the increase in interest expense and acquisition-related costs in the quarter.
In the quarter, TransDigm completed the acquisition of Elektro-Metall Export GmbH (EME GmbH) for about $47.4 million to strengthen its presence in the aerospace electromechanical actuators, electrical and electromechanical components and assemblies, primarily for commercial aircrafts, helicopters and other specialty applications segments.
TransDigm expects to reap positive synergies from its recent acquisitions and has raised its outlook for fiscal 2014 to highlight the benefits of the EME GmbH acquisition. The company expects fiscal 2014 net sales to be in the range of $2,317 million to $2,367 million versus the earlier range of $2,283 million to $2,343 million. Adjusted earnings per share are expected to be in the range of $7.46–$7.70 a share, compared with the previously projected range of $7.35 to $7.65 per share.
However, TransDigm is currently affected by the debt burden and higher interest expense. At the end of the quarter, the company’s long-term debt stood at $5.7 billion, compared with the debt of $4.3 billion in the second-quarter of 2013. Moreover, TransDigm has been funding its dividends by taking loans, which can drag down its bottom line going forward. In 2013, the company had borrowed about $1.8 billion to payout special dividends.
Also, the company’s defence business is significantly dependent upon the government contracts. The projects being spread over a multi-year period are more prone to delays and cancellations and can significantly weigh on the company’s business.
TransDigm currently holds a Zacks Rank #4 (Sell). Other better-ranked stocks that look promising at the moment include Ducommun Inc. (DCO), CAE Inc. (CAE) and Curtiss-Wright Corp. (CW). All three stocks carry a Zacks Rank #2 (Buy).