We recently compiled a list of the 10 Best Aerospace and Defense Stocks to Buy Now. In this article, we are going to take a look at where TransDigm Group Incorporated (NYSE:TDG) stands against the other aerospace and defense stocks.
The world has been rocked with conflict over the last few years. The war between Russia and Ukraine has gone beyond 860 days, with no immediate end in sight. Azerbaijan and Armenia continue to engage in a regular exchange of fire after the latter lost control of the Nagorno-Karabakh region to the Azeris in 2020. The Middle East is up in flames, with defense experts describing the ongoing Israel-Hamas conflict as the worst crisis in the region since the Arab-Israeli War in 1973.
While the human impacts of war are undeniably tragic, it is also a time when defense companies make money and lure investors into loading up on their stocks.
When the war broke out, industry analysts expected the aerospace industry to be affected by Western sanctions placed on Russia. According to KPMG, the country is the source of 30% of the titanium used by Boeing and other large engine producers that power fighter jets and commercial aviation. Titanium is a key material that goes into the development of jet fan blades and landing gears. However, the supply of titanium from Russia to these companies has largely remained unaffected despite sanctions.
While sharing his insights on commercial aviation at an Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said that he had noticed a significant growth in aircraft orders lately, with industry leaders combined having a 12-year backlog of orders. He believes there are three reasons driving it. The first catalyst, according to him, is China which accounts for 20% of the growth in orders to cater to the growing middle class in both China and India who want to travel more.
Another critical factor he cited during his talk was that business travel has finally returned to the 2019 pre-pandemic level. A recent report by Deloitte stated that corporate travel in the United States was on track to surpass the pre-pandemic level in 2024. Of those surveyed by Deloitte, 73% percent responded that they plan to travel more this year for work, up 15 points from last year. Lastly, Tony highlighted the rising middle class in the United States, and the world, which is increasing air travel and contributing to the economic growth in the industry.
Turning to the defense industry, Tony acknowledged that the world has not been in a more peculiar and volatile environment in recent decades and that expenditure on defense is set to continue to rise. As a former pilot and a student of military history post World War II, he also shared his analysis on defense spending in the US and stated that the figure did not depend on whether a Republican or Democrat is in office, rather it is the situation that dictates the level of funding.
Methodology
Insider Monkey’s database of 920 hedge funds was assessed, as of the first quarter of 2024. We have chosen the 10 best aerospace and defense stocks to buy now based on the hedge fund sentiment towards each stock. The stocks are ranked in ascending order of hedge fund holders in each company.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial shot of a modern commercial jetliner in flight, its wings glinting in the sunlight.
TransDigm Group Incorporated (NYSE:TDG)
Number of Hedge Fund Holders: 78
TransDigm Group Incorporated (NYSE:TDG) is an American aerospace company headquartered in Cleveland that manufactures engineered aircraft components, such as avionics, pumps, and valves. It is the best aerospace and defense stock to buy right now, according to Insider Monkey’s database with 78 hedge funds bullish on the company, with their stakes collectively amounting to $6.62 billion. Mark Massey’s AltaRock Partners is the largest stakeholder among hedge funds in the company.
During the second quarter of the year, the company reported an EPS of $7.99, smashing estimates of $7.42 per share. President and Chief Executive Officer, Kevin Stein, credited the strong results in the quarter to the global commercial aviation trends, as the industry continues to recover and return to normalization amid an increase in demand for air travel. He also believes that there is much progress to be made ahead as OEM aircraft production rates are still well below the pre-pandemic levels.
Investors are optimistic about the growth prospects of TransDigm Group Incorporated (NYSE:TDG) as well. ClearBridge Global Growth Strategy stated the following in its first quarter 2024 investor letter:
U.S. aircraft parts manufacturer TransDigm Group Incorporated (NYSE:TDG) was our largest addition. TransDigm is a steady compounder with strong pricing power coming from regulatory barriers that limit the number of competitors and due to its proprietary intellectual property, which makes it a sole supplier of many certified aircraft parts. We believe the company will see long-term duration of growth ahead as it benefits from the expansion of the aerospace aftermarket and acquisitions in this still-fragmented space.
Moreover, there is consensus among analysts about the stock’s Buy rating, backed by an average share price target of $1,384, which is an upside of 11.5% from its current value. The price adjustments reflect recent developments such as the Calspan unit divestiture, acquisition of Raptor Scientific, and cash buy of CPI’s Electron Device Business, which are set to bolster TransDigm Group Incorporated (NYSE:TDG)’s financial outlook.
Overall TDG ranks 1st on our list of the best aerospace and defense stocks to buy. You can visit 10 Best Aerospace and Defense Stocks to Buy Now to see the other aerospace and defense stocks that are on hedge funds’ radar. While we acknowledge the potential of TDG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TDG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.