Three Reasons to Own Transdigm Group

“Sully” Sullenberger is my hero!  The now famous pilot of US Airways flight 1549 kept his head and saved the lives of 155 people on a cold NYC afternoon.  His calculated and controlled response to a true emergency is admirable and the scenario is an important reminder to all of us as to how important life is.

The situation is also an important reminder of the importance of aircraft maintenance.  Whether mechanical issues had anything to do with the crash or not, the fact remains that more attention than ever will be given to the importance of keeping aircraft well serviced and in top shape.

TransDigm Group Incorporated (TDG) makes parts for aircraft and turns a healthy profit on these products.  The company typically sells original equipment for a wash or even a small loss.  But once the company’s systems are installed on a plane, TDG makes good margins on the replacement parts.  Since TransDigm owns patent rights to most of its products, the competition is locked out and the company has a captive audience when it comes to clients.

So without further adieu,  here are my three reasons to own TransDigm Group:

1. Fundamental - The company produces strong cashflow and stable earnings.  Even with declining air travel, there is still plenty of business as airlines will continue to keep their planes maintained, and delivery flights continue at regularly scheduled intervals.  The company has significant debt but the stable business model provides enough cushion to manage that debt level.


2. Current Events - The recent airline crash will not only increase the public’s awareness of aircraft safety, but it could encourage regulatory bodies to take a closer look at the standards in place. Additionally, investors will likely migrate to TDG which has been a relatively unknown name just because of the business it is in.


3. Technical - The stock is trading in a much more attractive pattern than we saw a few months ago.  The stock has rebounded off its low with strong volume and is now creating a well-shaped base from which it could mount a significant rally.  Technical analysis may not be as important in the long-run, but it could help to drive trader interest in the coming weeks.

Transdigm announces earnings next week which should set the tone for several weeks if not months.  By the time the quarterly numbers are out, the stock could easily run higher making for a more risky entry point.  I would suggest starting a position before the announcement and then possibly adding to that position once the earnings picture is clear for the most recent quarter.

FD: Author does not have a position in TDG

TDG Notes

Additional Reading:

Minyanville: Citi’s Jet Gets Grounded

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