TDG TransDigm Group
A pricing-power toll road on aircraft parts, fairly priced for its moat but carrying heavy leverage.
The story
TransDigm owns roughly 90% sole-source, proprietary aerospace components; about 55% of revenue and most of its profit come from the aftermarket. Because certification makes its parts very hard to replace, it earns pricing power that shows up as operating margins above 45%. It is a mature compounder that grows through commercial aftermarket recovery, rising defense spending and a steady stream of debt-funded acquisitions, which it reprices aggressively. The moat is durable, but the balance sheet is heavily leveraged and the pricing model carries regulatory and political scrutiny.
Year-1 growth is set below the 17.6% five-year CAGR because acquired growth will slow as organic aftermarket and defense growth normalizes. Margin is held near the TTM 46% rather than the 47.6% peak. Sales-to-capital is 1.0, not the reported 0.49, because the reported figure is swollen by acquisition goodwill, while organic growth needs little capital and future deals will still cost a premium. Beta is above the 1.2 anchor to reflect about $27B of net debt, and the 12-year horizon fits a genuine sole-source aftermarket franchise; together these drivers land near the market price instead of the mechanical $360 baseline.
Value drivers
| Revenue growth (Y1) | 11.0% |
| Terminal growth | 3.5% |
| Forecast horizon | 12y |
| Target operating margin | 46.0% |
| Years to target margin | 3 |
| Sales-to-capital | 1.00 |
| Beta | 1.30 |
| Failure probability | 2.0% |
| Cost of capital (WACC) | 9.7% |
| Terminal WACC | 8.8% |
Valuation bridge
| PV of explicit FCFF | 32.90B |
| PV of terminal value | 40.69B |
| Equity value | 45.45B |
| ÷ shares → per share | $822.15 |
News
bearish -0.30 · 8 articles
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- TransDigm Faces Near-Term Sentiment Headwinds Despite Robust Execution, RBC Says
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- These 5 Aviation Stocks Slide As Melius Warns ‘Several Years Of Robust’ Aftermarket Growth May Be Ending
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Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 11.11B | 11.0% | 46.2% | 4.05B | 1.10B | 2.95B | 2.68B |
| 2 | 12.25B | 10.3% | 46.1% | 4.46B | 1.15B | 3.31B | 2.75B |
| 3 | 13.43B | 9.6% | 46.0% | 4.88B | 1.18B | 3.69B | 2.79B |
| 4 | 14.64B | 9.0% | 46.0% | 5.31B | 1.20B | 4.11B | 2.83B |
| 5 | 15.85B | 8.3% | 46.0% | 5.75B | 1.21B | 4.54B | 2.85B |
| 6 | 17.05B | 7.6% | 46.0% | 6.19B | 1.20B | 4.98B | 2.85B |
| 7 | 18.23B | 6.9% | 46.0% | 6.62B | 1.18B | 5.44B | 2.84B |
| 8 | 19.37B | 6.2% | 46.0% | 7.03B | 1.14B | 5.89B | 2.80B |
| 9 | 20.44B | 5.5% | 46.0% | 7.42B | 1.07B | 6.34B | 2.75B |
| 10 | 21.43B | 4.9% | 46.0% | 7.78B | 994.08M | 6.78B | 2.68B |
| 11 | 22.33B | 4.2% | 46.0% | 8.10B | 896.29M | 7.21B | 2.59B |
| 12 | 23.11B | 3.5% | 46.0% | 8.39B | 781.53M | 7.61B | 2.49B |
Key risks
- About $27B of net debt magnifies any aftermarket downturn or rise in refinancing rates
- DoD Inspector General and congressional scrutiny of sole-source pricing could cap margins on defense spares
- Fewer acquisition targets or higher deal multiples could slow the compounding engine
Catalysts
- Growth in commercial flight hours and aging fleets as OEM delivery delays keep older aircraft flying
- Deploying capital into new acquisitions or special dividends at high returns on capital