TransDigm Group Incorporated (TDG), Aerosonic Corporation (AIM): This Company Is Well Positioned and Is Making Smart, Accretive Acquisitions

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TransDigm recently made two acquisitions and is participating in a growing portion of the aerospace industry.

TransDigm Group Incorporated (NYSE:TDG) made a bid to purchase Aerosonic Corporation (NYSEMKT:AIM) for $39 million in a deal announced late last month. Under the terms of the deal, Aerosonic Corporation (NYSEMKT:AIM) holders receive $7.75 per share, a 60% premium to the closing price the day prior to the deal. The deal values Aerosonic Corporation (NYSEMKT:AIM) at around 11x TTM EBITDA.

TransDigm Group Incorporated (NYSE:TDG)

Aerosonic Corporation (NYSEMKT:AIM) is a manufacturer of highly engineered components for military and commercial aircraft. It produces proprietary air data sensing equipment and display components. The deal is funded by cash on hand. It fits TransDigm Group Incorporated (NYSE:TDG)’s acquisition parameters with over 50% of sales coming from the aftermarket, as 60% of sales at Aerosonic Corporation (NYSEMKT:AIM) are aftermarket.

The deal was well received by the Street and helped push TransDigm Group Incorporated (NYSE:TDG) to an all time. TransDigm Group Incorporated (NYSE:TDG) also announced the acquisition of Arkwin Industries last month for $286 million in cash. The transaction values Arkwin at 8.7x EBITDA. Arkwin manufactures hydraulic and fuel system components for airplane and helicopters. It has content in The Boeing Company (NYSE:BA) 737s and Airbus A320s, as well as in many military planes and helicopters.

Management stated that the deal will create significant value and analysts estimate the deal is accretive to FY14 earnings in the range of 5%-7%. Aftermarket sales are a bit below TransDigm Group Incorporated (NYSE:TDG)’s target, but are still 40% of total sales.

TransDigm Group Incorporated (NYSE:TDG)’s outlook

Recent results at TransDigm were encouraging. In TransDigm’s latest earnings report, the company beat consensus EPS by $0.01 and had sales growth of 10% y/y. Management also revised guidance upwards in the report.

TransDigm’s focus on the aftermarket has paid dividends for shareholders. Aftermarket parts revenue streams have the effect of stabilizing sales in an otherwise cyclical industry like aerospace. In addition, TransDigm derives 75% of sales from products where it is the only supplier, according to fund managers at Royce. This helps further stabilize sales, gives it pricing power, and should result in above industry-average margins.

The firm also benefits from long-term global trends. According to a recent report from the International Air Transport Association (IATA), the airline industry will have 3.6 billion passengers in 2016. That is an increase of 800 million from the 2.8 billion in 2011, and a CAGR of 5.3% from 2012 through 2016. Not surprisingly, Russia and former Soviet states, Asia, Latin America, and the Middle East will lead the growth in passenger traffic. International freight volumes are expected to grow at 3% per annum.

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