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Transdigm Continues as a ‘Super Stock’ in 2016

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Aug. 12 2016, Updated 11:04 a.m. ET

Transdigm Group’s ten-year returns

Transdigm Group (TDG) became public in March 2006. Since then, the company’s stock has compounded wealth at an astonishing clip. On August 9, 2006, Transdigm was trading at $23.18 per piece. On August 9, 2016, the stock closed at $287.04 for a compound annual growth rate of 28.7% in the ten-year period. And you could have chosen any date—the stock traded around $25 throughout the year. We have chosen August 9 to account for the technically correct definition of the ten-year period.

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Transdigm’s YTD returns

Investors who had taken positions in Transdigm stock at the beginning of the year haven’t done badly either. They would have earned a solid 24.9% returns year-to-date, by August 9, on their investments. During the same period, the S&P 500 would have fetched 8.4% in capital gains. This is still better than some of the airframers (XAR) such as Boeing (BA) and Airbus (EADSY). They still are close to breaking even this year, even after including their dividend returns.

Pricing multiples

As you might expect, Transdigm trades at a fairly high trailing PE (price-to-earnings) multiple of 27.7x. This is lower than its five-year trailing PE average of 32.4x. It’s substantially lower than the 64.2x multiple it traded at on September 16, 2014. There are several things going on for Transdigm that warrant such a high multiple. The company generates 55% of its revenues from the aftermarket. Once a contract is won, it’s a source of recurring, stable sales for a 25 to 30-year period. For 90% of its products, the company has no competition at all. The probability of an upstart stealing Transdigm’s thunder is also low because of the highly regulatory nature of the aerospace (PPA) industry. The tendency of customers to stick with an established supplier due to safety issues and the long drawn-out process of receiving approval from the FAA creates significant barriers to entry.

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