TransDigm: Aerospace Play Set to Take Flight

12/17/2019 5:00 am EST

Focus: INDUSTRIALS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

We’ve labeled TransDigm (TDG) as the best growth stock few investors have heard of, with a unique, dependable story and a management team that’s proven adept at making the right moves, notes growth stock expert Mike Cintolo, editor of Cabot Top Ten Trader.

The firm makes highly engineered components for the aerospace industry, with revenues split relatively evenly between defense, commercial OEM and commercial aftermarket sales.

The most attractive feature here is that TransDigm is one-of-a-kind outfit — around 90% of the widgets it sells are proprietary, and in 80% of the cases, it’s the sole-source provider!

Combined with the aftermarket business, that means the company has a steady, dependable (excellent profit margins here) and very long runway of growth opportunities, all of which is like catnip to institutional investors.

Recent revenue growth has been bolstered by the huge acquisition of Esterline (M&A is a key driver of growth over time), but organically, the top line was up 8% in the latest quarter (10.5% for the past year) and should be up in the mid- to upper-single digits in 2020, while earnings are expected to expand at a faster clip (up 14%), both of which are likely conservative.

And, really, the attraction here isn’t just Q4 or 2020, but the fact that little is standing in the way of TransDigm cranking out mid-teens earnings growth (and occasionally returning value to shareholders—it paid a one-time special $30 per share dividend earlier this year) for many years to come.

Technically, the stock staged a powerful breakout in January of this year, which was a clue that the stock was a leader. The advance since then has had plenty of ups and downs, including some wobbles before and after earnings in mid November. But shares are up six weeks in a row and have tightened up a bit of late, too.

We’re OK starting a small position here and adding more on a decisive push above $585. As for the high price, don’t worry about it — just buy fewer shares.

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