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.
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.
TransDigm is a key supplier to The Boeing Company (NYSE:BA) and Airbus, the two major global commercial aircraft manufacturers. This portion of the business is the key driver going forward with U.S. Defense budget under pressure. Both The Boeing Company (NYSE:BA)’s 787 Dreamliner and the Airbus A380 will play roles in OEM sales at TransDigm. In addition, aftermarket parts for the popular The Boeing Company (NYSE:BA)737s and Airbus A320s will help margins at TransDigm and contribute to greater sales stability. If TransDigm could receive a larger sliver of The Boeing Company (NYSE:BA)’s $81.2 billion in revenue, it would be sitting well.
In this chart, note the differences in multiples for TransDigm versus The Boeing Company (NYSE:BA), which has a higher percentage of OE sales and BAE Systems PLC (ADR) (OTCMKTS:BAESY), which has a larger percentage from defense. Companies with greater earnings predictability over a cycle and consistent revenue command higher multiples. BAE Systems PLC (ADR) (OTCMKTS:BAESY) has a 4% ROA even with the safety of holding over $5 billion in cash. That is a lot of cash for a $20 billion market cap. It is up 44% in the last 52 weeks.
There are a lot of reasons to like TransDigm. It participates in a growth trend of increasing airline passenger traffic, focuses on the higher margin, more consistent aftermarket portion, and keeps making logical, accretive acquisitions. However, the multiple does reflect a lot of this. It is a stock worth watching and potentially reassessing on pullbacks in the share price.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Company Is Well Positioned and Is Making Smart, Accretive Acquisitions originally appeared on Fool.com is written by Mike Thiessen.
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