TDG - Transdigm

[Liberty]

So, how do you know that the reverse is happening at the moment?

 

They periodically disclose how much content they have on various airframes, and the numbers seem to be going up with new ones. The numbers also go up over time with acquisitions, of course.

 

Here's a recent slide:

 

http://i.imgur.com/R5qVbVI.jpg

 

The note at the bottom says that these numbers don't include the acquisitions since june 2013, so the actual numbers are higher.

[loganc]

Really appreciate all of the feedback Schwab and Liberty.  This is all really helpful.

[Phaceliacapital]

So, how do you know that the reverse is happening at the moment?

 

They periodically disclose how much content they have on various airframes, and the numbers seem to be going up with new ones. The numbers also go up over time with acquisitions, of course.

 

Here's a recent slide:

 

http://i.imgur.com/R5qVbVI.jpg

 

The note at the bottom says that these numbers don't include the acquisitions since june 2013, so the actual numbers are higher.

 

Do you know if PCP provides these kind of graphs?

[Liberty]

Not sure, I haven't looked at PCP in a little while.

[orion]

"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."

The backlog has never been that long before, Arment said. "It's usually been only a few years."

 

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full

[Jurgis]

"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."

The backlog has never been that long before, Arment said. "It's usually been only a few years."

 

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full

 

And what comes at the end of supercycle?  ;)

[Liberty]

"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."

The backlog has never been that long before, Arment said. "It's usually been only a few years."

 

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full

 

And what comes at the end of supercycle?  ;)

 

All those planes keep flying for decades and require parts. TDG doesn't make its money on OEMs anyway.

 

Unless you don't think the Chinese and Indians and Brazilians and Indonesians, etc, have as much a desire to fly as everyone else, I don't think RPMs are going down any time soon.

[giofranchi]

I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

 

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

 

Cheers,

 

Gio

 

[Liberty]

I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

 

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

 

Cheers,

 

Gio

 

Welcome to the club :)

[muscleman]

I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

 

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

 

Cheers,

 

Gio

 

Hi Gio,

    What's your valuation on TDG? It seems to me that the FCF multiple is close to 20 but the FCF annual increase rate is only in the 8-10% range.

[giofranchi]

Hi Gio,

What's your valuation on TDG? It seems to me that the FCF multiple is close to 20 but the FCF annual increase rate is only in the 8-10% range.

 

Well, I think something of this quality should trade around at least 20 x Adjusted EPS. Right now it is trading at 26x. They have increased revenues at a CAGR of 20.5% for many years and I think their market is large enough to go on increasing them at a similar annual rate for many more years into the future. Adjusted EPS should follow suit.

If they compound Adjusted EPS at 20% and 10 years from now TDG is trading at 20x, my annual return would be 20 x 0.75 = 15% compounded annual.

 

Cheers,

 

Gio

 

[mateo999]

I posted this a few minutes ago in the PCP thread, but thought some following dig'm might care...

 

When hearing a pitch on PCP in April, Ackman asked about 3D printing as a "when, not if" type disruptor to the business.  Those doing the pitching brushed off the notion essentially as ridiculous.  This comes to mind:

 

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

 

-Bill Gates

 

 

And so it begins (from Bloomberg this morning):

 

EasyJet to Use Drones to Inspect Jets, Mulling 3-D-Printed Parts

By Benjamin Katz and Kari Lundgren

(Bloomberg) -- EasyJet Plc said it will begin using drones to inspect jets on the ground starting next year and is experimenting with the 3-D printing of replacement parts as it pursues innovations to keep costs down.  The airline said it has succeeded in using a drone to inspect one of its planes and will roll out the robots at engineering bases over the next 12 months. The technology is intended to trim the number of hours jetliners are out of service, the Luton, England-based company said in a statement.

 

Europe’s second-biggest discount carrier is looking for ways to use technology to cut costs and trim delays caused by mechanical failures. Technologies under development include three-dimensional printing to replace cabin parts such as armrests, reducing repair times and the need for storage space, and in-flight troubleshooting of technical problems in conjunction with Airbus Group SE, which supplies its planes.

 

“We have made great strides on our work with drone technology,” Chief Executive Carolyn McCall said in the statement, adding that EasyJet is continuing to “look for new and original innovations to help run our operation smoothly.”

 

Drones could be used to pick up damage caused by a lightning strike, the kind of incident that can require a full day of inspections. An overnight delay can cost as much as 15,000 pounds ($23,133), EasyJet has said.

[Liberty]

I think this could affect PCP more than TDG. If someone ever 3D-prints TDG's stuff, it's likely to be TDG. They own the IP and the only certification for most of what they sell, and most of what they make is under-the-radar because they are small, low-cost parts (not big sexy engine blades or whatever).

[fisch777]

I think it is more likely that 3D printing disrupts high-margin aftermarket replacement parts than the primarily-OEM parts PCP is producing.  3D makes sense when low-volume, quick production is paramount versus cost, not in planned production lines.  ~85% of PCP sales are OEM.  In fact, making cheaper aftermarket replacement parts by copying "proprietary" IP is exactly what Heico has been doing for years.  Heico reverse engineers proprietary parts made by Pratt, GE, etc and then gets them PMA-certified.  At least in developed countries, it would be illegal to 3D print a replacement part to install on an aircraft without PMA (or similar) certification that can take 1-2 years.

 

I can see some disruption possible on the fastener side, but large cast & forged parts are unlikely to be duplicated by a printer.  You can also bet both TDG and PCP are investing in this already.

 

[giofranchi]

Welcome to the club :)

 

Actually, I have changed my mind… It is not the price at all: I think it is not cheap, but neither too expensive. Imo a fair price to open a new position leaving some room to average down.

 

What bothers me instead is exactly what bothered me with VRX: I cannot easily find organic growth results. Therefore, I cannot easily assess the performance of all the businesses they have bought and keep on buying, after they have been acquired.

 

Liberty,

You have followed TDG for a long time now: could you help me get a clearer picture of their organic growth? I know their aim is Organic EBITDA Growth around 10-12%, but what are the metrics you are looking at to monitor how Organic EBITDA is actually growing?

 

I like TDG very much, but without the certainty I am able to understand their business results correctly, I must watch it from the sidelines, just like I watched VRX from the sidelines for a while.

 

Thank you!

 

Gio

 

[giofranchi]

Organic net sales grew approximately 8%

--Nicholas Howley, 2014 Annual Letter

 

Very good! :)

 

Is there a place they show organic growth in a more systematic way than the annual letter?

 

Thank you,

 

Gio

[cmlber]

Organic net sales grew approximately 8%

--Nicholas Howley, 2014 Annual Letter

 

Very good! :)

 

Is there a place they show organic growth in a more systematic way than the annual letter?

 

Thank you,

 

Gio

 

Every quarter in the quarterly results presentation they have a slide showing organic revenue growth for the quarter by segment and a slide showing FY outlook.  Slides 6 and 7 of the most recent quarters presentation.  You can back into what that translates to in terms of organic EBITDA growth by taking revenue growth times gross margin over last years EBITDA.

 

[Liberty]

Welcome to the club :)

 

Actually, I have changed my mind… It is not the price at all: I think it is not cheap, but neither too expensive. Imo a fair price to open a new position leaving some room to average down.

 

What bothers me instead is exactly what bothered me with VRX: I cannot easily find organic growth results. Therefore, I cannot easily assess the performance of all the businesses they have bought and keep on buying, after they have been acquired.

 

Liberty,

You have followed TDG for a long time now: could you help me get a clearer picture of their organic growth? I know their aim is Organic EBITDA Growth around 10-12%, but what are the metrics you are looking at to monitor how Organic EBITDA is actually growing?

 

I like TDG very much, but without the certainty I am able to understand their business results correctly, I must watch it from the sidelines, just like I watched VRX from the sidelines for a while.

 

Thank you!

 

Gio

 

You are selling your 8% position the day after buying it?  ???

 

They sometimes break down organic growth, and sometimes do a pro-forma of revenues by sector excluding recent acquisitions, but you mostly have to infer it yourself by keeping track of acquisitions.

 

As long as I can keep an eye on organic growth once in a while, I don't mind not having an update every quarter. It would be nice to have it conveniently packaged at frequent intervals, but I tend to trust their track record on that front. With RPMs growing faster than GDP, they'd really have to screw things up to not get a lift from that.

[giofranchi]

Every quarter in the quarterly results presentation they have a slide showing organic revenue growth for the quarter by segment and a slide showing FY outlook.  Slides 6 and 7 of the most recent quarters presentation.  You can back into what that translates to in terms of organic EBITDA growth by taking revenue growth times gross margin over last years EBITDA.

 

Thank you very much! Very helpful! :)

 

Cheers,

 

Gio

 

[giofranchi]

You are selling your 8% position the day after buying it?  ???

 

;D ;D

 

No, actually I thought I was going to, but hadn’t pulled the trigger yet… Evidently, I was still a bit uncomfortable…

Now I will go back many quarters and check if they systematically disclose organic growth in revenues by sectors like you and cmlber have suggested… That would be great!

 

Cheers,

 

Gio

 

[giofranchi]

This time I have truly pulled the trigger! ;D

 

And I have opened an 11% new position in TDG.

 

Besides the fact of TDG being the most successful “platform company not owned by PSH”, also debt imo is not really too much of a concern: 1) they seem to be able to deleverage quite rapidly, if they want to, 2) debt seems to be a “choice” more than a necessity: much of the recent increase in debt was due to the payment of a special dividend to shareholders.

Howley clearly consider TDG’s capital structure as a mean to create shareholders’ value, and I am confident he keeps adjusting it for the better.

 

I now plan to use part of my monthly free cash to increase my TDG investment.

 

Cheers,

 

Gio

 

[abyli]

Gio:

 

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with higher growth, with a little debt and fantastic president.

 

Bing

[giofranchi]

Gio:

 

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with even higher growth, fantastic president.

 

Bing

 

Is there a thread about Constellation Software? I agree its president is fantastic, but don't know much about the company yet. A thread on this board would be very useful! ;)

 

Gio

[Liberty]

Gio:

 

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with even higher growth, fantastic president.

 

Bing

 

Is there a thread about Constellation Software? I agree its president is fantastic, but don't know much about the company yet. A thread on this board would be very useful! ;)

 

Gio

 

There you go:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/csu-constellation-software/

 

CSU has been one of my faves for a few years. Never really talked about it before around here, but since there's discussion about it bubbling up, might as well make a thread :)

[Liberty]

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2071953

 

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