TDG - Transdigm

[Guest Schwab711]

https://www.faa.gov/regulations_policies/handbooks_manuals/aircraft/amt_handbook/media/FAA-8083-30_Ch12.pdf

 

Check the "strategies" forum for the history of the airline industry and regulations.

[NewbieD]

Company looks interesting.

 

Any thoughts on if Transdigms profitbability could be reduced due to 3d-printing competitors?

http://nordicinvestor.net/2015/10/19/arcam-ceo-expects-aerospace-boom-3d-printing/

 

 

[big_triece]

Company looks interesting.

 

Any thoughts on if Transdigms profitbability could be reduced due to 3d-printing competitors?

http://nordicinvestor.net/2015/10/19/arcam-ceo-expects-aerospace-boom-3d-printing/

 

I don't think it's a huge threat. For a part to go onto an airplane, it has to receive FAA approval, which is both costly and time consuming. Established companies with a proven safety history and knowledge of navigating the regulatory approval process have big advantages. Especially in the case of a company like TDG because they are so often the sole-source provider. It would take a lot for an airline to choose an unproven part with a new manufacturing process over a proven component from a reputable long-term provider. If anything, I think TDG could utilize the 3d printing technology more to their advantage.

[rishig]

Companies run by Outsider CEOs are great ones to invest in. But ignoring the framework of value investing is dangerous - as seen in Valeant, Colfax. Great company at a bad price removes the margin of safety element. It is hard to tell in foresight all the things that can go wrong - end markets are cyclical and cycle turns (Colfax), regulatory risks (Valeant).

 

Who knows all the things that can go wrong with Transdigm. Just because nothing has gone wrong doesn't mean it won't. At current valuation, in my opinion, the margin of safety is small to protect from the unknown unknowns. The same applies to Constellation Software.

[Liberty]

Companies run by Outsider CEOs are great ones to invest in. But ignoring the framework of value investing is dangerous - as seen in Valeant, Colfax. Great company at a bad price removes the margin of safety element. It is hard to tell in foresight all the things that can go wrong - end markets are cyclical and cycle turns (Colfax), regulatory risks (Valeant).

 

Who knows all the things that can go wrong with Transdigm. Just because nothing has gone wrong doesn't mean it won't. At current valuation, in my opinion, the margin of safety is small to protect from the unknown unknowns. The same applies to Constellation Software.

 

Hi Rishi,

 

Do you consider your investments in MA/V (I don't remember if you own both or just MA) and PCLN, as well as GOOGL (I assume), to be exceptions? They don't seem to be particularly cheap.

[rishig]

Companies run by Outsider CEOs are great ones to invest in. But ignoring the framework of value investing is dangerous - as seen in Valeant, Colfax. Great company at a bad price removes the margin of safety element. It is hard to tell in foresight all the things that can go wrong - end markets are cyclical and cycle turns (Colfax), regulatory risks (Valeant).

 

Who knows all the things that can go wrong with Transdigm. Just because nothing has gone wrong doesn't mean it won't. At current valuation, in my opinion, the margin of safety is small to protect from the unknown unknowns. The same applies to Constellation Software.

 

Hi Rishi,

 

Do you consider your investments in MA/V (I don't remember if you own both or just MA) and PCLN, as well as GOOGL (I assume), to be exceptions? They don't seem to be particularly cheap.

 

I invested in MA/V in 2010 at ~15-16x P/E TTM, PCLN at 18x P/E TTM. GOOGL, I can't comment given my relationship there.

 

I continue to hold but I trim my position sizes as P/E goes up. Also, unlike Valeant and Transdigm, both have no debt.

 

The range of valuation for MA/V, PCLN during my holding period has been 15x - 28x on a TTM basis. The valuations at Valeant, Colfax have been way way higher.

[Liberty]

Thanks!

[Liberty]

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2113950

 

Acquiring Breeze-Eastern Corporation for 206m. A public company this time.

[giofranchi]

I continue to hold but I trim my position sizes as P/E goes up.

 

Well, that is exactly how I invest in both CSU and TDG (and now in V and MA too): as long as P/E ratios stay high, I’ll keep my positions relatively small and leave lots of room to average down.

 

Cheers,

 

Gio

 

[Guest Schwab711]

As a side game, here are my possible future acquisition targets for TDG (listed alphabetically):

ATRO

BZC

DCO

LMIA  (Presentation remind you of anyone? - http://files.shareholder.com/downloads/LMIA/0x0x828641/BD0D0F42-9CAF-403F-B0A2-159C22B0C10D/LMI_InvestorPresentation_May2015.pdf)

 

 

1 down, 3 to go.

[giofranchi]

I continue to hold but I trim my position sizes as P/E goes up.

 

Well, that is exactly how I invest in both CSU and TDG (and now in V and MA too): as long as P/E ratios stay high, I’ll keep my positions relatively small and leave lots of room to average down.

 

Cheers,

 

Gio

 

By the way it is not much clear how a low PE would protect you when an highly indebted company gets accused of fraud... The same is true for Colfax: after it got "cheap", it went on getting much cheaper...

 

You have chosen the right businesses so far in V, MA, and Google... Good for you! But imo the choice of the right business is what matters the most when you plan to hold an investment for years.

 

Cheers,

 

Gio

[Spekulatius]

By the way it is not much clear how a low PE would protect you when an highly indebted company gets accused of fraud... The same is true for Colfax: after it got "cheap", it went on getting much cheaper

 

CFX was never "cheap" and is certainly not cheap now. A business that trades at 20x earnings and may be shrinking for a couple of years is certainly not cheap in my book. Now a single digit earning multiple and a decent balance sheet, that would be cheap.

[giofranchi]

CFX was never "cheap" and is certainly not cheap now. A business that trades at 20x earnings and may be shrinking for a couple of years is certainly not cheap in my book. Now a single digit earning multiple and a decent balance sheet, that would be cheap.

 

Well, I have never followed Colfax closely; therefore, I cannot be sure about what has actually happened.

However, if what you say is true, imo it only corroborates what I was saying: Colfax share price went south despite the fact its multiple hasn’t contracted much. The losses were generated by a business which didn’t perform like shareholders expected, rather than a PE that went from very high to low.

Also what you call a “decent balance sheet” is imo a business judgement: how much debt can I safely use? Which are the risks associated with the amount of debt I see on the balance sheet? What is conservative and what is aggressive? The answers differ from business to business.

By the way, Mr. Klarman in Margin Of Safety says these things very clearly.

 

Cheers,

 

Gio

 

[NewbieD]

GE Aviation orders 10 3D-printers to produce turbine blades:

http://nordicinvestor.net/2015/12/22/arcam-ge-subsidiary-orders-10-ebm-systems/

 

Turbine blades seem like a pretty mission critical part. If this can be 3D-printed, most parts could possibly be. Seems like this will decrease the value of transdigms manufacturing knowledge and machinery? I like the company but this fear is stopping me from buying.

[big_triece]

GE Aviation orders 10 3D-printers to produce turbine blades:

http://nordicinvestor.net/2015/12/22/arcam-ge-subsidiary-orders-10-ebm-systems/

 

Turbine blades seem like a pretty mission critical part. If this can be 3D-printed, most parts could possibly be. Seems like this will decrease the value of transdigms manufacturing knowledge and machinery? I like the company but this fear is stopping me from buying.

 

3D printing is not the game changer you think it is for aerospace. For each part that you are going to utilize 3D printing, you have to get that process approved by the FAA, which takes lots of time and money. You can't just say, we are switching to 3D printing for all parts. Mission critical or not, each one of those parts and the manufacturing processes have to undergo an approval process by the FAA, or foreign counterpart. For a company like Transdigm (or HEICO or PCP) that has hundreds, if not thousands, of parts / systems in the supply chain, it will be a long time before a competitor can eat away at their market share via a lower-cost manufacturing process. The playing field may start to shift away from them, but it will not occur quickly (IMHO).

[marazul]

3D printing will help everyone in the testing of new parts, etc..but when it comes to manufacturing high volume units, 3D printing is not the most effective way. So to be honest, I don't think this will have a significant impact on the economics of the current players.

[Picasso]

Anyone else think this stock looks incredibly expensive in this environment?  I don't see how their debt will keep trading at current yields for deep, deep junk territory at 7x EBITDA especially with a big chunk coming due in 2018.  It seems to me like they are more likely to focus on reducing debt versus continuing acquisitions which takes off some upside risk on a short.  If their cost of funds go up to say 8-9% then your equity stub earns a heck of a lot less and it already has a fairly large enterprise value relative to the aerospace sector.

 

Just curious if anyone is shorting the name here.  It's got to be the only junk bond levered name that hasn't caught up to reality.

[cmlber]

Anyone else think this stock looks incredibly expensive in this environment?  I don't see how their debt will keep trading at current yields for deep, deep junk territory at 7x EBITDA especially with a big chunk coming due in 2018.  It seems to me like they are more likely to focus on reducing debt versus continuing acquisitions which takes off some upside risk on a short.  If their cost of funds go up to say 8-9% then your equity stub earns a heck of a lot less and it already has a fairly large enterprise value relative to the aerospace sector.

 

Just curious if anyone is shorting the name here.  It's got to be the only junk bond levered name that hasn't caught up to reality.

 

There is no debt coming due in 2018.  Earliest material maturity is in 2020.  They'll be down under 6x EBITDA in a year just by EBITDA growth (excluding debt pay down).  Unlevered this is yielding around 5% right now.  Historically they've grown organically by around 10%.  Sell 5% more parts each year due to traffic growth and raise prices 2-3%.  It's a simple formula that I think will continue for a long time.  If you get just the volume growth with no pricing growth, you still get 5% organic growth with a 5% yield and end up making 10% unlevered without any acquisitions. 

 

Low oil is great for TDG, older planes will fly longer meaning more aftermarket revenue.  Also, national security will be a big issue this election season and military spending will likely benefit.  Neither of those is material to the long thesis, but worth noting.

[Picasso]

You're right the nearest large chunk is actually 2020.  I think part of my thinking here is, and I may be wrong, there are a lot of stocks where low oil should be good for them and it just isn't happening that way in this environment.  At the same time you really need that organic growth to justify this price.

 

Just musing this over but downside on a short doesn't seem like a lot at this price.

[thepupil]

FWIW, Picasso, when I have spoken to market participants about the resilience of TDG against industrials, the roll-up complex, and the broader market and that it may be a possible short (because I noticed how well it was holding up too), I have been repeatedly told that TDG is actually deserves the "outsider/compounder/insert buzzword here" more so than many other companies. You can interpret that as complacency or whatever, but this has been repeated to me by people who were/are skeptical about a lot of the other companies. I have no opinion and no value to offer on the name other than my anecdote.

[cmlber]

You're right the nearest large chunk is actually 2020.  I think part of my thinking here is, and I may be wrong, there are a lot of stocks where low oil should be good for them and it just isn't happening that way in this environment.  At the same time you really need that organic growth to justify this price.

 

Just musing this over but downside on a short doesn't seem like a lot at this price.

 

That's true, but low oil is just a nice added bonus, if oil was $120 I'd still want to own TDG at this price. 

 

Yes, you need organic growth.  But the organic growth is very consistent and predictable imo.  Roughly every 15 years for the last 45 years airline traffic has doubled, and it is likely to do the same over the next 45 years.  Meanwhile, for the last 20 years TDG has raised prices every year as far as I can tell and is able to continue doing so because they are the sole supplier of low dollar, mission critical parts.

[Larry]

Results out.

 

http://finance.yahoo.com/news/transdigm-group-reports-fiscal-2016-121500731.html

 

Highlights for the first quarter include:

 

    Net sales of $701.7 million, up 19.6% from $586.9 million;

    EBITDA As Defined of $319.4 million, up 18.4% from $269.7 million;

    Net income of $114.9 million, up 20.3% from $95.5 million;

    Earnings per share of $1.97, up 20.9% from $1.63;

    Adjusted earnings per share of $2.27, up 26.1% from $1.80; and

    Upward revision to fiscal 2016 financial guidance.

 

 

Stock was down more than 12% shortly after opening. I think one reason is that their organic growth was down slightly. It seems like there was continued weakness with helicopters and business jets.

 

They bought back stock (which they dont do that often) during the last quarter and after it ended. I think it's interesting that they have decided to repurchase shares rather than take the leverage down, given the turbulence with bond markets and the fact that their leverage has been at the high end after recent acquisitions.

 

Call begins in 30 min, very curious to hear their thoughts.

[cmlber]

Results out.

 

http://finance.yahoo.com/news/transdigm-group-reports-fiscal-2016-121500731.html

 

Highlights for the first quarter include:

 

    Net sales of $701.7 million, up 19.6% from $586.9 million;

    EBITDA As Defined of $319.4 million, up 18.4% from $269.7 million;

    Net income of $114.9 million, up 20.3% from $95.5 million;

    Earnings per share of $1.97, up 20.9% from $1.63;

    Adjusted earnings per share of $2.27, up 26.1% from $1.80; and

    Upward revision to fiscal 2016 financial guidance.

 

 

Stock was down more than 12% shortly after opening. I think one reason is that their organic growth was down slightly. It seems like there was continued weakness with helicopters and business jets.

 

They bought back stock (which they dont do that often) during the last quarter and after it ended. I think it's interesting that they have decided to repurchase shares rather than take the leverage down, given the turbulence with bond markets and the fact that their leverage has been at the high end after recent acquisitions.

 

Call begins in 30 min, very curious to hear their thoughts.

 

Free cash flow is ~$600m / year growing organically by high single digits and the maturities are 5-9 years out (weighted average 6.5 years out).

 

If you assume 5% organic growth, which is much lower than historical, it would take 9 years to get to $0 net debt if all cash flow was used to pay down debt.  At that point, you'd have a debt free business earning $25/share growing at mid/high single digits organically.  So given how stable the cash flows are, I think the leverage is not nearly as risky as some perceive and am happy management continues to take advantage of low interest rates to add to borrowing to fund acquisitions/buybacks.

[Larry]

Yea, very good point. I have no problem with the leverage and that they are repurchasing stock. Afterall they know the situation and outlook much better than I do.

 

And I think free cash flow is higher than 600m. It has been +/- 50% of EBITDA as Defined so that would make +700m for FY16. If I remember correctly, in last call they said free cash flow is going to be 700-750m for FY16.

[Guest Schwab711]

I doubt there will be any growth until the Dreamliner picks up. They have invested roughly $1b (my estimate) in related businesses over the past few years. They made a big bet on the model.