Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: stahleyp on March 16, 2013, 10:51:32 AM

Title: TDG - Transdigm
Post by: stahleyp on March 16, 2013, 10:51:32 AM
I'm surprised this hasn't been posted, with the popularity of Outsiders, so I decided to start a thread. Thorndike (the author) brings up the company on page 34.

TDG is a components manufacturer. He says that it has grown cash flow at a compound rate of over 25% since 1993 and is similar to Capital Cities back in the day.  He goes on to say that they company has a nice moat due to how their parts are engineered into military and commercial aircraft.

It also has decent insider ownership.

I have virtually no experience in this sector so I wanted to throw the idea out there!
Title: Re: TDG - Transdigm
Post by: wellmont on March 16, 2013, 11:39:15 AM
this one is on my buy in a bear market list...
Title: Re: TDG - Transdigm
Post by: stahleyp on March 16, 2013, 11:50:16 AM
Yeah, wellmont, I was thinking about that too. It's certainly not cheap right now.
Title: Re: TDG - Transdigm
Post by: rogermunibond on March 16, 2013, 01:23:09 PM
It's essentially a rollup compny of avionics, aviation, and tech parts manufcturers. I looked at it shortly after their ipo in 2007 and passed :(. They weren't cheap then either, and based on there moat and fcf I don't think they will get cheap.  Alan Fournier of Pennant bought them early on and still holds all the shares. Big winner for them.

Warburg Pincus was the sponsor.  I've tracked a number of Warburg Pincus companies that have done very well after ipo, so I watch for them now. Don't want to make the same mistake again.
Title: Re: TDG - Transdigm
Post by: giofranchi on October 25, 2013, 06:29:06 AM
Recent post by The Brooklyn Investor:

http://brooklyninvestor.blogspot.it/2013/10/transdigm-group-tdg.html


giofranchi
Title: Re: TDG - Transdigm
Post by: jay21 on October 25, 2013, 06:33:47 AM
It's essentially a rollup compny of avionics, aviation, and tech parts manufcturers. I looked at it shortly after their ipo in 2007 and passed :(. They weren't cheap then either, and based on there moat and fcf I don't think they will get cheap.  Alan Fournier of Pennant bought them early on and still holds all the shares. Big winner for them.

Warburg Pincus was the sponsor.  I've tracked a number of Warburg Pincus companies that have done very well after ipo, so I watch for them now. Don't want to make the same mistake again.

If you are sure that these guys have a huge moat and will grow earnings or cash flow a share by > 10%, then a 20x multiple can be cheap imo.
Title: Re: TDG - Transdigm
Post by: Liberty on November 14, 2013, 06:49:39 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1876282&highlight=
Title: Re: TDG - Transdigm
Post by: Cunninghamew on November 14, 2013, 06:53:47 AM
Ha.. I was reading about them yesterday. Wally Weitz's shop post brief blurbs on companies every so often that are worth reading. Here is their post on TDG

https://weitzinvestments.com/resources/documents/Literature_and_Publications/About/News/Analyst%20Corner.pdf (https://weitzinvestments.com/resources/documents/Literature_and_Publications/About/News/Analyst%20Corner.pdf)

Title: Re: TDG - Transdigm
Post by: Liberty on November 20, 2013, 04:49:00 PM
http://www.beyondproxy.com/tdg/
Title: Re: TDG - Transdigm
Post by: stahleyp on November 20, 2013, 04:52:23 PM
ha. I was getting ready to post that too, Liberty.   ;)

As a side note, it looks like a couple of the tiger funds have a position in it too.
Title: Re: TDG - Transdigm
Post by: giofranchi on February 04, 2014, 05:18:51 AM
Quote
TransDigm Group Reports Fiscal 2014 First Quarter Results

CLEVELAND, Feb. 4, 2014  /PRNewswire/ -- TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, today reported results for the first quarter ended December 28, 2013.

Highlights for the first quarter include:
•Net sales of $529.3 million, up 23.0% from $430.4 million;
•EBITDA As Defined of $243.6 million, up 21.2% from $200.9 million;
•Net income of $86.1 million, up 16.1% from $74.2 million;
•Earnings per share of $1.44, up 118.2% from $0.66;
•Adjusted earnings per share of $1.66, up 9.9% from $1.51; and
•Upward revision to fiscal 2014 financial guidance.

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1896533&highlight=


Gio
Title: Re: TDG - Transdigm
Post by: Liberty on May 06, 2014, 05:52:28 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1927287&highlight=

Quote
Highlights for the second quarter include:

Net sales of $590.8 million, up 26.9% from $465.6 million;
EBITDA As Defined of $263.0 million, up 19.9% from $219.3 million;
Net income of $90.4 million, up 33.0% from $67.9 million;
Earnings per share of $1.49, up 19.2% from $1.25;
Adjusted earnings per share of $1.87, up 7.5% from $1.74; and
Upward revision to fiscal 2014 financial guidance.

Presentation : http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjMyOTQ0fENoaWxkSUQ9LTF8VHlwZT0z&t=1
Title: Re: TDG - Transdigm
Post by: Olmsted on May 06, 2014, 12:39:49 PM
Great addition to the board.  Thanks for introducing Transdigm for discussion, stahleyp.

I've previously looked at Transdigm's strategy and execution.  It's basically a publicly-traded buyout shop.  They're as good as it gets in aerospace suppliers.  A collection of very niche businesses, with a focus on aftermarket sole-source parts (meaning, they can charge whatever price they want).  They make random stuff that you never think about it.  Like the toilet flush handle in a commercial airliner, or some random gromit on a cockpit door.  Crazy margins for a parts supplier.  The businesses run more or less independently, but the parent is good at squeezing out some costs with supply chain scale.  Very targeted growth.  Although it's an acquisition machine, they still achieve decent organic growth.

My big concern with an investment here: they have achieved tremendous success in rolling up the "long tail" of niche, sole-source parts suppliers.  How much runway does this strategy have left?  How many attractive roll-up candidates are still out there?  The price reflects continued growth.
Title: Re: TDG - Transdigm
Post by: Olmsted on May 06, 2014, 12:42:21 PM
If you are sure that these guys have a huge moat and will grow earnings or cash flow a share by > 10%, then a 20x multiple can be cheap imo.

I am sure they have a moat.  Less clear on growth.  By my reckoning, organic growth has been around 5%.  You have to feel comfortable with their ability to continue to find good acquisitions.
Title: Re: TDG - Transdigm
Post by: Olmsted on May 06, 2014, 12:45:41 PM
this one is on my buy in a bear market list...

Agreed.  A great watch-list candidate.
Title: Re: TDG - Transdigm
Post by: Liberty on May 06, 2014, 02:10:39 PM
My big concern with an investment here: they have achieved tremendous success in rolling up the "long tail" of niche, sole-source parts suppliers.  How much runway does this strategy have left?  How many attractive roll-up candidates are still out there?  The price reflects continued growth.

I think they have a huge M&A runway. The industry is gigantic if you take into account both the commercial and defense side. They barely have started buying businesses HQ'ed outside of the US (they have 4 businesses in Europe, but I think 3 came with other businesses, only one - the most recent EME acquisition - was directly acquired in Germany).

In many of their investor day presentations they have slides that show how many potential acquisitions targets they estimate are out there (and what proportion is of what revenue size and EBITDA margins). Looks like a huge fishing pond.

Maybe it'll become a problem in 10-15 years, I don't know, but I don't see it for the foreseeable future...
Title: Re: TDG - Transdigm
Post by: siddharth18 on May 06, 2014, 05:18:40 PM
Amazing company really. They not only manufacture their parts, but also invent them and hold patent on them. Their strategy is to sell parts for a new airline at a slight loss, to prevent competitors from entering - this is the first few years. Then for the next couple of decades of the life of the airplane, they are the only source for replacement parts. High margins, no competitor to speak of, religious price increases year after year. Airlines may hate them, but can't get rid of them.

A competitor would have to design their own parts, have them FAA approved, convince airlines to buy it from them instead of a reputed leader like TransDigm and of course they have to be better/cheaper than TransDigm. Really a one-of-a-kind company.
Title: Re: TDG - Transdigm
Post by: Liberty on May 06, 2014, 05:26:25 PM
Amazing company really. They not only manufacture their parts, but also invent them and hold patent on them. Their strategy is to sell parts for a new airline at a slight loss, to prevent competitors from entering - this is the first few years.

I think that's slightly incorrect. They only give parts at a loss while new airplanes/helicopters are in development. Once they are in production, they make money on what they sell to OEMs. It's just that the margins there are much lower than in the aftermarket.

They do sell relatively inexpensive parts for which they are the sole source in about 90% of the cases, so it's usually not worth it for anyone else to go through the trouble of developing a competing part and getting it certified for a platform (a process that is long and expensive, and doesn't even guarantee they'll be able to steal much business from Transdigm because there are also non-monetary factors -- airlines care a lot about safety, and won't risk putting a part from a manufacturer that doesn't have the good reputation of transdigm just to save a few bucks. Not a good risk/reward profile).

Transdigm is very good operationally too. They tend to buy businesses making margins in the 20% EBITDA range most of the time as far as I can tell, and over time bring them up to their own average which is in the high 40s. Anyone trying to compete with them likely won't have their low costs, so if they do get competition, TDG can probably undercut them and still make a profit because they have more margin to play with.
Title: Re: TDG - Transdigm
Post by: Liberty on May 12, 2014, 04:36:27 PM
Optimizing the capital structure again, and considering another special dividend:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1929518&highlight=

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1930106&highlight=
Title: Re: TDG - Transdigm
Post by: wbr on May 13, 2014, 04:37:03 AM
Are the TDG special dividends "return of capital" and thus tax free?
Title: Re: TDG - Transdigm
Post by: no_thanks on May 13, 2014, 05:09:06 AM
Are the TDG special dividends "return of capital" and thus tax free?

Yea, I believe they are.  My cost basis at Fidelity was adjusted lower for the last one.  Don't know about any future ones though.  It's in my IRA so I haven't really paid any attention to it. 
Title: Re: TDG - Transdigm
Post by: Liberty on July 11, 2014, 01:32:26 PM
Anyone have access to Credit suisse's new report? I'd be curious to see how they justify a 230 price target. Thanks in advance.
Title: Re: TDG - Transdigm
Post by: Haasje on July 11, 2014, 02:16:23 PM
Maybe I don't understand it correctly but I'm a little skeptical about selling parts in development stage at cost or negative margin and then squeezing every bit of value out of it after the OEM runs with them for these parts. I mean, they see this tactic coming a mile away with the next plane right? Why keep contracting guys as suppliers who are going to bleed you dry.

Is that approvement process really so expensive no one wants to go through it and earn 20-30 years of duopoly-like margins?

I'm not arguing there is no moat here, because the returns show there is, I'm just not so sure the approvement procedure and development stage pricing drive it.
Title: Re: TDG - Transdigm
Post by: jschembs on July 11, 2014, 02:28:49 PM
Anyone have access to Credit suisse's new report? I'd be curious to see how they justify a 230 price target. Thanks in advance.

Here's the CS piece.
Title: Re: TDG - Transdigm
Post by: Liberty on July 11, 2014, 03:05:35 PM
Anyone have access to Credit suisse's new report? I'd be curious to see how they justify a 230 price target. Thanks in advance.

Here's the CS piece.

Thank you, much appreciated  :)
Title: Re: TDG - Transdigm
Post by: Scudbucket on July 11, 2014, 06:31:37 PM
How do you guys think about customer concentration in terms of all airplane manufacturers having similar risk exposures affecting their businesses at the same time (like rising oil prices) and therefore capital spending?
Title: Re: TDG - Transdigm
Post by: loganc on July 11, 2014, 06:36:02 PM
Anyone have access to Credit suisse's new report? I'd be curious to see how they justify a 230 price target. Thanks in advance.

Here's the CS piece.

Awesome.  Thank you, sir.
Title: Re: TDG - Transdigm
Post by: Liberty on July 11, 2014, 07:52:17 PM
How do you guys think about customer concentration in terms of all airplane manufacturers having similar risk exposures affecting their businesses at the same time (like rising oil prices) and therefore capital spending?

They make the real money on the aftermarket, so their profitable customers are more those who operate the planes than those who build them. Not much concentration there. As long as planes fly, they'll need replacement parts, and if you look a chart of revenue passenger miles, even 9/11 just made things plateau for a while and 2008-2009 was a small dip, so it would take a lot to keep enough planes grounded to really make a difference... Even in bankruptcy airlines keep flying. Even if all the manufacturers had a big slowdown, individual planes have such long lifes and the new additions from a single year are such a small part of the total fleet that it would take many years of that to make a meaningful difference.
Title: Re: TDG - Transdigm
Post by: Cunninghamew on July 18, 2014, 02:11:34 PM
I was curious what people thought about the leverage metrics?  The absolute amount of debt the company runs with is very high $5.7 bill (in terms of debt to ebitda). They have cash of $475mm.  The interest coverage ratios are good and tend to fall in around 3x (EBITDA to interest expense). I am just curious, because on one hand I have no concern (EBITDA could take a good hit and we would be fine) and on another I am concerned (total debt is very high, years to pay off debt is high).

Also, wondering if we have been in a long bull cycle for the biz
Title: Re: TDG - Transdigm
Post by: Liberty on July 18, 2014, 05:46:45 PM
I was curious what people thought about the leverage metrics?  The absolute amount of debt the company runs with is very high $5.7 bill (in terms of debt to ebitda). They have cash of $475mm.  The interest coverage ratios are good and tend to fall in around 3x (EBITDA to interest expense). I am just curious, because on one hand I have no concern (EBITDA could take a good hit and we would be fine) and on another I am concerned (total debt is very high, years to pay off debt is high).

Also, wondering if we have been in a long bull cycle for the biz


Like a Malone business, you have to be confortable with the leverage, and trust that management is an expert at creating a capital structure that is optimized, but not too optimized.

The current leverage is pretty high because they just levered up and paid big special dividends, but if you look at it historically, they delever pretty fast after these recaps, and a lof of their debt isn't due for a while.

As with Malone, the question is: Are their cash flows durable enough to support that leverage. Each investor has to answer that question for himself...

I kind of doubt they've just been riding one cycle. They went through all kinds of stuff just in the past 15 years and navigated all those situations admirably.
Title: Re: TDG - Transdigm
Post by: jay21 on July 27, 2014, 07:44:47 AM
I am starting to do work on this one.  The leverage is very high, so I don't see it becoming a large position.  However, if you can pull of a PE model, you can have very attractive returns.

Apparently PE runs in the Howley's blood.  Mike Howley is the managing partner of a PE fund (Bratenahl Partners) where Nick is on the investment committee:

"Bratenahl Capital Partners (BCP) is located in the historic warehouse district in downtown Cleveland, Ohio. BCP operates with a substantial amount of our own committed capital, as well as access to significant additional capital through our other investment partners.

We are able to move quickly to assess and decide on opportunities. To date, BCP has completed more than 30 fund investments and 24 co-investments. Over an 8-year span, BCP has achieved greater than a 50% IRR on 16 exited investments, and a cash-on-cash return of about 3.4 times our invested dollars.

Bratenahl Capital Partners was founded in 2003. Michael Howley, the current Managing Partner, was an original founder."

http://www.bratenahlcapital.com/about/
Title: Re: TDG - Transdigm
Post by: Liberty on July 27, 2014, 07:59:30 AM
Good find, Jay. I didn't know about Mike.
Title: Re: TDG - Transdigm
Post by: Liberty on August 05, 2014, 06:07:24 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1955222&highlight=

Quote
Net sales of $610.6 million, up 25.0% from $488.6 million;
EBITDA As Defined of $275.6 million, up 18.8% from $231.9 million;
Declared and paid a special dividend of $1.43 billion, or $25.00 per share, and related dividend equivalent payments;
Net income of $16.2 million, down from net income of $76.7 million, primarily due to one-time refinancing expenses;
Loss per share of $1.66, down from net earnings per share of $0.71, primarily due to dividend equivalent payments and previously mentioned refinancing expenses;
Adjusted earnings per share of $2.02, up 6.9% from $1.89; and
Revisions to fiscal 2014 financial guidance.
Title: Re: TDG - Transdigm
Post by: Liberty on August 25, 2014, 05:28:09 PM
Company has bought back 421k shares for $72m (average price of: $171)  in the recent quarter (from memory) and the CEO just did this:

http://www.sec.gov/Archives/edgar/data/1260221/000120919114054146/xslF345X01/doc4.xml

(Update:corrected mistake above)
Title: Re: TDG - Transdigm
Post by: jouni1 on August 26, 2014, 06:51:56 AM
Company has bought back 400m in the recent quarter (from memory) and the CEO just did this:

http://www.sec.gov/Archives/edgar/data/1260221/000120919114054146/xslF345X01/doc4.xml
hmm. last year he was selling at 140+ usd. wonder if something has made him more positive on the business, or was he hoping to get back in cheaper after the special dividends and added leverage?
Title: Re: TDG - Transdigm
Post by: Liberty on August 26, 2014, 07:06:15 AM
hmm. last year he was selling at 140+ usd. wonder if something has made him more positive on the business, or was he hoping to get back in cheaper after the special dividends and added leverage?

I expect management of TDG to frequently sell pretty big amounts of stock because of the way their compensation is set up -- I don't read much into selling for this company, but buying is a clear signal.

They say it themselves: They under-pay in cash and over-equitize to better align management (management owns about 10% of the business. Their options are 100% performance vested. They need 10% IRR to vest at 25%, and to vest at 100% they need to be above 17.5% IRR).

This means that just to have as much money in their pockets as the management of other similar companies in the industry, they need to periodically sell stock. But with those hurdles, at least they truly earned the money. No time vesting like in other companies, where you get stock just to sit around long enough.

(http://i.imgur.com/3Mi4ham.png)

(http://i.imgur.com/uTm1ODX.png)

(http://i.imgur.com/X00ooOc.png)
Title: Re: TDG - Transdigm
Post by: jouni1 on August 26, 2014, 07:23:01 AM
seems sensible when you put it like that, yes. i have no idea how much they make but yahoo finance shows 48 million in pay for howley. if that's the case, it's just two weeks salary which isn't relatively that much yet. however, berkshire partners seems to have been buying(quite a lot) in june around these prices also. they have rob small on the board so they probably have a better view in to the business than me.

might have to start getting comfortable with the valuation. i'm still a bit angry at mr. market for not discounting the company enough after the special dividends :(
Title: Re: TDG - Transdigm
Post by: Liberty on August 26, 2014, 07:28:59 AM
seems sensible when you put it like that, yes. i have no idea how much they make but yahoo finance shows 48 million in pay for howley. if that's the case, it's just two weeks salary which isn't relatively that much yet. however, berkshire partners seems to have been buying(quite a lot) in june around these prices also. they have rob small on the board so they probably have a better view in to the business than me.

might have to start getting comfortable with the valuation. i'm still a bit angry at mr. market for not discounting the company enough after the special dividends :(

About Howley, that's another thing they have explained in a recent meeting. Howley only got that much because he had a bunch of options vest at 100% at the same time (basically a multi-year compensation plan that paid all at once, afaik) because the company did so well in recent years plus some of the huge special dividends they did recently. But he's only getting what shareholders are getting, not a huge separate salary. You can see the break-down in one of the slides above (with the pie chart). His actual salary and bonuses are 4% of that amount.
Title: Re: TDG - Transdigm
Post by: jouni1 on August 26, 2014, 07:40:17 AM
thanks for breaking it down for me! all these compensation structures are totally foreign to me. looking at it, it seems to be built to incentivise the management correctly, which seems rare.
Title: Re: TDG - Transdigm
Post by: Liberty on August 26, 2014, 07:54:02 AM
No problem. They're pretty different from other companies and it took me a while to get comfortable. I recommend you find audio or transcripts of the investor days they hold yearly. These are like 3 hours long, but there's a lot of good info in there about how they operate and structure things.
Title: Re: TDG - Transdigm
Post by: fmnpartners on September 02, 2014, 12:04:45 AM
Has anyone considered the potential downside effects of the Dividend Equivalent Payment (DEP) feature of management's stock options?  While it is nice the DEPs are only available on vested options which (as others have already noted) are based on the achievement of some fairly high performance targets, the feature itself does strike me as a bit odd given the significant amount of capital distributed over the last few years.  Since the first quarter of F1Q13, the company appears to have paid out roughly ~$3.2b in cash for dividends and spent just over ~$1b on acquisitions (all data from CIQ).  As one might expect, Total Debt/EBITDA also looks to have risen from around ~4.5x at the end of fiscal 2012 to around ~7.5x on current LTM 6/30/2014 numbers.  Thus, management seems to have been borrowing significant amounts of money to make special dividend payments equating to roughly 2.8-3.0x annual EBITDA while deploying just a third of that amount into acquisitions.  This train of thought is not meant as a judgment on overall capital allocation and certainly it's not a dealbreaker for me, but it does perplex me somewhat, especially when one considers the fact management is not putting up capital for its share of the cash dividends, recent open market purchases notwithstanding.
Title: Re: TDG - Transdigm
Post by: Liberty on September 02, 2014, 06:37:15 AM
Their reasons for borrowing money have been explained on various conference calls. They consider high yield debt to be very mispriced currently and decided to reduce their cost of borrowing and load up while they had a chance. They also recap every few years to keep their leverage on target (they're a bit above it now, but they delever quickly); they generate more cash than they can deploy in M&A, hence the special dividends (and sometimes buybacks).

Part of how they create value is definitely leverage. It's up to each investor to determine if they think their businesses are predictable and resilient enough to support that leverage.

(http://i.imgur.com/r6AVRlR.jpg)
Title: Re: TDG - Transdigm
Post by: elevensecsrt4 on September 04, 2014, 11:30:23 AM
I've been researching this company and really am impressed with management

Liberty it seems Nicholas bought another block of stock in late August. I'm doing more research and just curious as to what you think the CEO sees in adding now. It sure seems he would know business health better than most.
Title: Re: TDG - Transdigm
Post by: Liberty on September 04, 2014, 11:38:08 AM
Liberty it seems Nicholas bought another block of stock in late August. I'm doing more research and just curious as to what you think the CEO sees in adding now. It sure seems he would know business health better than most.

It's hard to say, but I think he's a long-term kind of guy, so it could just be that he see things just continuing to go well overall for the indeterminate future.

He made a lot of cash with the recent special dividends, so it could just be that he wanted to reinvest some of his new liquidity.
Title: Re: TDG - Transdigm
Post by: Gamecock-YT on September 04, 2014, 12:08:47 PM
Liberty it seems Nicholas bought another block of stock in late August. I'm doing more research and just curious as to what you think the CEO sees in adding now. It sure seems he would know business health better than most.

It's hard to say, but I think he's a long-term kind of guy, so it could just be that he see things just continuing to go well overall for the indeterminate future.

He made a lot of cash with the recent special dividends, so it could just be that he wanted to reinvest some of his new liquidity.

That'd be my guess. You pull down $60 mm in compensation for the year, it has to go somewhere.
Title: Re: TDG - Transdigm
Post by: elevensecsrt4 on September 04, 2014, 05:10:32 PM
Does anyone have a position in tdg at the moment. Just curious. Management appears to be getting the job done for quite a while now. It definitely isn't cheap. But I'm contemplating a position for my children's education fund.
Title: Re: TDG - Transdigm
Post by: Liberty on September 04, 2014, 05:18:33 PM
Does anyone have a position in tdg at the moment. Just curious.

I do.
Title: Re: TDG - Transdigm
Post by: no_thanks on September 05, 2014, 05:42:44 AM
Does anyone have a position in tdg at the moment. Just curious. Management appears to be getting the job done for quite a while now. It definitely isn't cheap. But I'm contemplating a position for my children's education fund.

I do. 
Title: Re: TDG - Transdigm
Post by: Cunninghamew on September 05, 2014, 06:48:34 AM
same
Title: Re: TDG - Transdigm
Post by: jouni1 on September 13, 2014, 09:18:18 AM
another insider buy, james skulina (executive vice president) bought 1.2 million dollars worth of stock. i might have to "close my eyes" and follow suit.  ;D
Title: Re: TDG - Transdigm
Post by: elevensecsrt4 on September 13, 2014, 09:34:50 AM
I actually bought a small position as I continue to research the company further.
Insiders seem to love it at this level. I plan on holding for very long term. And like that the dividends usually lower overall per share cost, under the way they describe part of the dividend payment return of capital. Well run company, but not cheap.
Title: Re: TDG - Transdigm
Post by: Liberty on November 13, 2014, 04:57:33 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1989275

Quote
Highlights for the quarter and fiscal year include:

Fourth quarter net sales of $642.2 million, up 19.0% from $539.7 million;
Fourth quarter EBITDA As Defined of $291.1 million, up 17.3% from $248.2 million;
Fourth quarter adjusted earnings per share of $2.21, up 26.3% from $1.75;
Fiscal 2014 net sales of $2,372.9 million, up 23.3% from $1,924.4 million;
Fiscal 2014 EBITDA As Defined of $1,073.2 million, up 19.2% from $900.3 million;
Fiscal 2014 net income of $306.9 million, up 1.4% from $302.8 million;
Fiscal 2014 earnings per share of $3.16, up 32.2% from $2.39; and
Fiscal 2014 adjusted earnings per share of $7.76, up 12.5% from $6.90.

There's also been some new about the COO:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1976928

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1976929
Title: Re: TDG - Transdigm
Post by: muscleman on November 13, 2014, 08:35:35 AM
My big concern with an investment here: they have achieved tremendous success in rolling up the "long tail" of niche, sole-source parts suppliers.  How much runway does this strategy have left?  How many attractive roll-up candidates are still out there?  The price reflects continued growth.

I think they have a huge M&A runway. The industry is gigantic if you take into account both the commercial and defense side. They barely have started buying businesses HQ'ed outside of the US (they have 4 businesses in Europe, but I think 3 came with other businesses, only one - the most recent EME acquisition - was directly acquired in Germany).

In many of their investor day presentations they have slides that show how many potential acquisitions targets they estimate are out there (and what proportion is of what revenue size and EBITDA margins). Looks like a huge fishing pond.

Maybe it'll become a problem in 10-15 years, I don't know, but I don't see it for the foreseeable future...

How much additional growth room would you expect? Any quantitative guess?
AMZN for example, I could say that the current online sales/total retail sales is less than 1%, so there is probably a lot of growth in the future.
But how about this after market plane parts business?
Title: Re: TDG - Transdigm
Post by: Liberty on November 13, 2014, 09:53:59 AM
I can't say quantitatively. Multiples of the current size is probably right. This is a really huge industry.

But it's not with the top line that shareholders will be paid anyway, it's with per share FCF. The way they shrink the equity with huge special dividends and buy back shares, it's clear that they aren't empire-building and trying to swallow everything in sight, they care about per share returns and have high hurdles.
Title: Re: TDG - Transdigm
Post by: muscleman on November 13, 2014, 09:57:31 AM
I can't say quantitatively. Multiples of the current size is probably right. This is a really huge industry.

But it's not with the top line that shareholders will be paid anyway, it's with per share FCF. The way they shrink the equity with huge special dividends and buy back shares, it's clear that they aren't empire-building and trying to swallow everything in sight, they care about per share returns and have high hurdles.

That's true. Why did they buy back shares at the lofty 20 x pe this year? Is that an attempt to push up the stock price so they can get their options vested, or it really justifies the valuation?
They said the FCF is about 55% of EBITDA. How would I verify that is the case? Their machines will depreciate and needs maintainence capex for sure, but how much would that be?
Title: Re: TDG - Transdigm
Post by: Liberty on November 13, 2014, 10:06:43 AM
I can't say quantitatively. Multiples of the current size is probably right. This is a really huge industry.

But it's not with the top line that shareholders will be paid anyway, it's with per share FCF. The way they shrink the equity with huge special dividends and buy back shares, it's clear that they aren't empire-building and trying to swallow everything in sight, they care about per share returns and have high hurdles.

That's true. Why did they buy back shares at the lofty 20 x pe this year? Is that an attempt to push up the stock price so they can get their options vested, or it really justifies the valuation?
They said the FCF is about 55% of EBITDA. How would I verify that is the case? Their machines will depreciate and needs maintainence capex for sure, but how much would that be?

How about reading the 10Ks and transcripts of calls and investor days?
Title: Re: TDG - Transdigm
Post by: muscleman on November 19, 2014, 08:30:29 AM
I actually bought a small position as I continue to research the company further.
Insiders seem to love it at this level. I plan on holding for very long term. And like that the dividends usually lower overall per share cost, under the way they describe part of the dividend payment return of capital. Well run company, but not cheap.

What's your thoughts upon your research? I can't figure out how much more growth they have.
Title: Re: TDG - Transdigm
Post by: rishig on November 19, 2014, 09:02:44 AM
I actually bought a small position as I continue to research the company further.
Insiders seem to love it at this level. I plan on holding for very long term. And like that the dividends usually lower overall per share cost, under the way they describe part of the dividend payment return of capital. Well run company, but not cheap.

What's your thoughts upon your research? I can't figure out how much more growth they have.

Has anyone looked at smaller aero supplier companies like Meggitt PLC and MTU Aero Engines. The same economics that apply to the Transdigm companies apply here (mostly, other than the private equity style of TDG) - single source supplier of a component, great margin on aftermarket division, long stream of recurring revenues through aftermarket. In fact, these smaller companies are possible acquisition targets for Transdigm (GE aero ..). I think the problem is that everyone recognizes this is a great business and very very rarely they become cheap.
Title: Re: TDG - Transdigm
Post by: Liberty on January 27, 2015, 08:24:14 AM
Quarter is out. Looks good to me. If they hadn't done the special dividend and their interest costs were the same YoY, net income would be up around 30%, which shows the underlying earning power.

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2010768

Quote
Net sales of $586.9 million, up 10.9% from $529.3 million;
EBITDA As Defined of $269.7 million, up 10.7% from $243.6 million;
Net income of $95.5 million, up 10.9% from $86.1 million;
Earnings per share of $1.63, up 13.2% from $1.44;
Adjusted earnings per share of $1.80, up 8.4% from $1.66; and
Reaffirms previously stated Fiscal 2015 financial guidance.

Here's the audio of the call if anyone wants it:

https://www.dropbox.com/s/aiqygqjwul72s8x/2015-Q1-TDG-CC.m4a?dl=0
Title: Re: TDG - Transdigm
Post by: muscleman on January 27, 2015, 11:11:09 AM
Nice EPS growth. 30 P/E seems to high to me though to buy. :(
Title: Re: TDG - Transdigm
Post by: Liberty on January 27, 2015, 11:12:29 AM
Nice EPS growth. 30 P/E seems to high to me though to buy. :(

I wouldn't value it on EPS. FCF is where it's at.
Title: Re: TDG - Transdigm
Post by: Schwab711 on January 27, 2015, 01:21:58 PM
Quarter is out. Looks good to me. If they hadn't done the special dividend and their interest costs were the same YoY, net income would be up around 30%, which shows the underlying earning power.

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2010768

Quote
Net sales of $586.9 million, up 10.9% from $529.3 million;
EBITDA As Defined of $269.7 million, up 10.7% from $243.6 million;
Net income of $95.5 million, up 10.9% from $86.1 million;
Earnings per share of $1.63, up 13.2% from $1.44;
Adjusted earnings per share of $1.80, up 8.4% from $1.66; and
Reaffirms previously stated Fiscal 2015 financial guidance.

Here's the audio of the call if anyone wants it:

https://www.dropbox.com/s/aiqygqjwul72s8x/2015-Q1-TDG-CC.m4a?dl=0

To channel my inner Hank Hill, "yup". I have current Owners Earnings or FCF Potential (whatever we want to call it) at ~$10/sh for 2015. My only issue preventing me from buying is the relatively higher Debt/Capital compared to recent years while P/FCF is still ~20 which will put future special dividends out at least a couple years in my opinion.
Title: Re: TDG - Transdigm
Post by: moatsandvalue on February 01, 2015, 03:37:34 PM
Hi all,
Has anyone taken a look to Heico? Similar economics than TDG, but without debt. Business growing 15-20% anually.
Title: Re: TDG - Transdigm
Post by: Liberty on February 23, 2015, 05:09:42 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2018861

Quote
TransDigm Group Incorporated (NYSE: TDG) announced today a definitive agreement to purchase the Telair Cargo Group of businesses ("Telair"), a global leader in aerospace on-board cargo loading and handling, restraint systems and unit load devices from AAR CORP. (NYSE: AIR), for a total purchase price of approximately $725 million in cash, subject to adjustment. TransDigm expects to finance the acquisition through existing cash on hand and possible use of its existing revolving credit facility.

Telair revenues are anticipated to be about $300 million with EBITDA margins approaching 20% for fiscal year ending May 2015. Over 80% of revenues are from the commercial aerospace market with the balance from the military aerospace market. Approximately 45% of revenues come from the aftermarket, primarily commercial transport and cargo aircraft. Approximately 95% of the revenues are from proprietary products with about 80% sold on a sole source basis. The business consists of three major operating units, Telair International GmbH ("Telair Europe"), Nordisk Aviation Products, AS ("Nordisk") and AAR Cargo Systems ("Telair US"). The business employs just over 600 employees in its various locations worldwide.

Telair Europe, the largest operating unit in Telair and headquartered in Miesbach, Germany, accounts for approximately 60% of the revenues and a higher percentage of the profits. Telair Europe is a market leader in the design, manufacture and support of complete on-board baggage and cargo loading and handling systems for wide-body and narrow-body aircraft worldwide. Since its inception, it has developed long-standing relationships with Airbus and Boeing, resulting in a substantial installed base of systems worldwide as well as positions on a broad range of new and existing aircraft. Major platforms include the A320 family, A330/A340, A350, B747-8 I/F, B737-6/7/8/900 and the CRJ 700/900/1000.

Nordisk, headquartered in Holmestrand, Norway, is the market leader in the design, engineering, and manufacture of innovative and cost-effective unit load devices. Offering lower and main deck containers, special purpose pallets and platforms, Nordisk products are in service with nearly every airline or dedicated freight company.

Telair US, headquartered in Goldsboro, North Carolina, is also a supplier, designer and manufacturer of in-aircraft cargo loading systems and components for a variety of commercial and military platforms including passenger to freighter conversions. Major platforms include the A400M, B767F and XC-2, as well as A300 modifications.

"This is another sizable acquisition opportunity that meets our strategic, operational and value-creation criteria," stated W. Nicholas Howley, TransDigm's Chairman and Chief Executive Officer. "We are pleased with the opportunity to acquire a business of this size that so closely meets our business model. Telair has built a leading worldwide positon in cargo handling equipment and related aftermarket. The products are primarily highly engineered and proprietary. The business has a significant and growing aftermarket. They have continually invested in new platforms and are positioned for growth as the commercial aerospace and cargo markets continue to expand."

Mr. Howley continued, "We anticipate that the revenue run rate will be relatively flat for the first 12 to 18 months due to significant A400M shipments in fiscal year 2015 that will not fully repeat in fiscal year 2016. This should be offset by growth in other areas in fiscal 2016. The ramp up in A350 shipments will begin to contribute meaningfully beyond that. As with all of our acquisitions, we see opportunities for private equity like value creation for our shareholders from this transaction."

"We are confident that TransDigm's leadership will ensure a strong future for the Telair group, its employees and customers," said David P. Storch, Chairman and Chief Executive Officer of AAR.  "TransDigm is a leading global designer, producer and supplier of highly engineered aircraft components, systems and subsystems for use on nearly all commercial and military aircraft in service today."

The acquisition, which is expected to close within the next sixty days, is subject to regulatory approvals and customary closing conditions.
Title: Re: TDG - Transdigm
Post by: loganc on March 26, 2015, 01:13:32 PM
It appears that the Telair deal closed.  Any comments about lower EBITDA margins of Telair as compared with the current TDG business mix?  Is there any reason to expect improved margins at Telair going forward?
Title: Re: TDG - Transdigm
Post by: Liberty on March 26, 2015, 01:16:04 PM
They usually improve the margins of what they buy, though I don't know if they'll be able to bring this one all the way up to their average (seems like a tall order).
Title: Re: TDG - Transdigm
Post by: magno111 on March 26, 2015, 05:24:34 PM
They usually improve the margins of what they buy, though I don't know if they'll be able to bring this one all the way up to their average (seems like a tall order).

do you know how they improve margins with their acquisitions?
Title: Re: TDG - Transdigm
Post by: Gamecock-YT on March 26, 2015, 05:45:09 PM
Watch their latest investor day presentation on their website. Spells it out quite clearly.
Title: Re: TDG - Transdigm
Post by: Liberty on April 01, 2015, 08:28:49 AM
Another acquisition, this time smaller:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2031444

Nice that it's in Europe again. At the investor day (iirc) they were talking about how they had new people looking for deals in Europe and planned to be more active there.

Quote
TransDigm Group Incorporated (NYSE: TDG) announced today that it acquired the aerospace business of Franke Aquarotter GmbH ("the Company") for approximately $75 million in cash on March 31, 2015.

The Company, whose name going forward will be Adams Rite Aerospace GmbH, is located in Ludwigsfelde, Germany and employs approximately 50 people.  The Company manufactures proprietary faucets and related products for use on commercial transports and regional jets.  Major platforms include the Airbus A320, A330, A380 and Bombardier and Embraer regional jets.  Approximately 65% of revenue is derived from the commercial aftermarket and almost all revenue is proprietary and sole source.

W. Nicholas Howley, Chairman and CEO of TransDigm Group Incorporated, stated, "Franke Aquarotter has long been a premier manufacturer of proprietary lavatory products with established positions on high use platforms, significant aftermarket content and an outstanding reputation. The highly engineered products are used on almost every Airbus commercial transport platform. The business fits well with TransDigm and will be combined with our Adams Rite lavatory product line in Fullerton, California. As with all TransDigm acquisitions, we see opportunities for significant value creation through our proven value creation methodology."
Title: Re: TDG - Transdigm
Post by: Schwab711 on April 01, 2015, 08:44:25 AM
Another acquisition, this time smaller:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2031444

Nice that it's in Europe again. At the investor day (iirc) they were talking about how they had new people looking for deals in Europe and planned to be more active there.

Quote
TransDigm Group Incorporated (NYSE: TDG) announced today that it acquired the aerospace business of Franke Aquarotter GmbH ("the Company") for approximately $75 million in cash on March 31, 2015.

The Company, whose name going forward will be Adams Rite Aerospace GmbH, is located in Ludwigsfelde, Germany and employs approximately 50 people.  The Company manufactures proprietary faucets and related products for use on commercial transports and regional jets.  Major platforms include the Airbus A320, A330, A380 and Bombardier and Embraer regional jets.  Approximately 65% of revenue is derived from the commercial aftermarket and almost all revenue is proprietary and sole source.

W. Nicholas Howley, Chairman and CEO of TransDigm Group Incorporated, stated, "Franke Aquarotter has long been a premier manufacturer of proprietary lavatory products with established positions on high use platforms, significant aftermarket content and an outstanding reputation. The highly engineered products are used on almost every Airbus commercial transport platform. The business fits well with TransDigm and will be combined with our Adams Rite lavatory product line in Fullerton, California. As with all TransDigm acquisitions, we see opportunities for significant value creation through our proven value creation methodology."


GIGA looks like it could be a future acquisition target. It's really small ($8m MC) but that doesn't seem to scare them off.


Also, I recently wrote about TDG. Would definitely be interested to hear critiques on my writing. I'm trying to write more now that I have more time and it is certainly not a strength just yet. :)
http://seekingalpha.com/article/3042866-transdigm-when-is-a-large-moat-worth-more-than-30x-earnings
Title: Re: TDG - Transdigm
Post by: Jurgis on April 02, 2015, 12:58:05 PM
I'd love to buy stock in this company. However, it is expensive.

You are somewhat right that you can rationalize the expensiveness and make a case for OKish returns going forward.

But then why does management issue special divvies and not share buybacks? Assuming they are smart - and we all think so I believe - they probably do this because they believe the shares to be overvalued.

Great company, high price. But, yes, waiting so far meant lost opportunity.
Title: Re: TDG - Transdigm
Post by: Liberty on April 02, 2015, 01:14:17 PM
Also, I recently wrote about TDG. Would definitely be interested to hear critiques on my writing. I'm trying to write more now that I have more time and it is certainly not a strength just yet. :)
http://seekingalpha.com/article/3042866-transdigm-when-is-a-large-moat-worth-more-than-30x-earnings

So that was you! I saw it, but only had time to skim it. Seemed like a good overview.
Title: Re: TDG - Transdigm
Post by: Liberty on April 02, 2015, 01:22:51 PM
But then why does management issue special divvies and not share buybacks? Assuming they are smart - and we all think so I believe - they probably do this because they believe the shares to be overvalued.

Great company, high price. But, yes, waiting so far meant lost opportunity.

They did do some buybacks recently, but they've mentioned previously that they like special dividends because they can get a return of capital treatment for most of them, so taxes aren't too bad, and buybacks have a high execution risk. Their stock isn't exactly standing still, so if you want to do a return of capital  of the size that they've been doing (multiple billions) via buyback, you'd need to buy a massive amount and you'd probably drive the price up quite a bit. I also don't think they think their stock is significantly undervalued. They'd probably do bigger buybacks if that was the case.
Title: Re: TDG - Transdigm
Post by: Liberty on April 02, 2015, 01:45:21 PM
New CFO:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2032118

Gotta say, the Cliffs background is a bit scary, but I'm sure they vetted him well.
Title: Re: TDG - Transdigm
Post by: loganc on April 02, 2015, 04:36:29 PM
New CFO:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2032118

Gotta say, the Cliffs background is a bit scary, but I'm sure they vetted him well.

Quite the disparity between CLF and TDG on the business quality spectrum.  What is your thinking about the COO and CFO retirements happening in such quick succession?       
Title: Re: TDG - Transdigm
Post by: Liberty on April 02, 2015, 07:31:54 PM
New CFO:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2032118

Gotta say, the Cliffs background is a bit scary, but I'm sure they vetted him well.

Quite the disparity between CLF and TDG on the business quality spectrum.  What is your thinking about the COO and CFO retirements happening in such quick succession?     

We'll see. The guy was also a partner at KMPG. It's possible to find very talented people in all kinds of companies. Tim Cook worked at Compaq...

If I remember correctly, the COO is staying on the board, and the CFO is sticking around for almost two years too (until end of 2016), so they're not exactly jumping ship in haste. I think it could be kind of a cohort effect, people who have been with the company for a long time (I'd have to dig the dates up, but if they've been there since the early 90s, that's a pretty nice run) and reaching retirement around the same time.

It's certainly something to keep an eye on. But they seem to have a strong management culture and a well established model that is teachable, so hopefully this is a smooth transition.
Title: Re: TDG - Transdigm
Post by: Jurgis on April 03, 2015, 11:46:21 AM
I don't think the COO/CFO leaving is a smoking gun, but I do think that there is a risk for the new people to start bending the rules which might hit a levered company much more than unlevered one if something blows up.

It's not a significant risk: I agree with Liberty that new people might be great and they might integrate well. But something to keep in a corner of the mind for investors.
Title: Re: TDG - Transdigm
Post by: Liberty on April 30, 2015, 04:53:37 PM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2042797

New acquisition, $496m (with some tax assets).
Title: Re: TDG - Transdigm
Post by: loganc on April 30, 2015, 07:19:30 PM
Is there any business in this space that is close to TDG in terms of business mix exposure to aftermarket?   
Title: Re: TDG - Transdigm
Post by: Liberty on May 01, 2015, 03:46:17 AM
Is there any business in this space that is close to TDG in terms of business mix exposure to aftermarket?   

Close? Not that I've  found.
Title: Re: TDG - Transdigm
Post by: Liberty on May 05, 2015, 05:39:32 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2043926

Quote
Highlights for the second quarter include:

Net sales of $619.0 million, up 4.8% from $590.8 million;
EBITDA As Defined of $288.1 million, up 9.5% from $263.0 million;
Net income of $110.9 million, up 22.7% from $90.4 million;
Earnings per share of $1.96, up 31.5% from $1.49;
Adjusted earnings per share of $2.11, up 12.8% from $1.87; and
Upward revision to fiscal 2015 financial guidance.

W. Nicholas Howley, TransDigm Group's Chairman and Chief Executive Officer, stated, "This has been a busy 60 days for our team.  We closed two acquisitions for about $800 million in purchase price in the calendar month of March and announced the execution of a contract for a third deal last week for approximately another $500 million of purchase price. All three of these businesses are primarily commercial transport focused with significant proprietary and aftermarket content.  All three acquisitions fit well with our consistent strategy and should yield private equity-like returns for our shareholders."
Title: Re: TDG - Transdigm
Post by: loganc on May 05, 2015, 06:46:31 PM
Maybe this is a stupid question, but,  looking at the 2Q slide deck, why do they not provide a numerical breakout between OEM and Aftermarket with respect to Adj EBITDA?  Is there some place in the filings that I should look to find the numerical breakout?
Title: Re: TDG - Transdigm
Post by: loganc on May 13, 2015, 08:24:27 PM
Again, probably stupid question, but how do you guys think about the debt structure here?  So, they did 450MM @ 6.5% due 2025.  As of 12/31/14 there is 3.9B of term loans.  Is it not a significant risk to not term out some of the term loan?   It seems like the Malone entities are working towards fixed rate leverage (e.g. SIRI balance sheet and the recent refinancings at VM). 
Title: Re: TDG - Transdigm
Post by: jschembs on May 13, 2015, 08:58:39 PM
It's essentially a rollup compny of avionics, aviation, and tech parts manufcturers. I looked at it shortly after their ipo in 2007 and passed :(. They weren't cheap then either, and based on there moat and fcf I don't think they will get cheap.  Alan Fournier of Pennant bought them early on and still holds all the shares. Big winner for them.

Warburg Pincus was the sponsor.  I've tracked a number of Warburg Pincus companies that have done very well after ipo, so I watch for them now. Don't want to make the same mistake again.

If you are sure that these guys have a huge moat and will grow earnings or cash flow a share by > 10%, then a 20x multiple can be cheap imo.

It's interesting to read these posts from 2013, where 20x is considered an acceptable hurdle that most of us would consider expensive. I've certainly come to appreciate the hidden value of ~25x EPS on strong, sustainable growth, but I wonder what folks would substitute for 20x in the earlier quote in today's environment. TDG is currently around 60x TTM EPS.

I recognize much of the bump in P/E is the substantial increase in debt/interest expense, so the relative increase in EV/EBIT is less so. The downside of course is the significantly reduced margin for error in business execution introduced by the debt load.
Title: Re: TDG - Transdigm
Post by: Liberty on May 14, 2015, 05:35:48 AM
It's essentially a rollup compny of avionics, aviation, and tech parts manufcturers. I looked at it shortly after their ipo in 2007 and passed :(. They weren't cheap then either, and based on there moat and fcf I don't think they will get cheap.  Alan Fournier of Pennant bought them early on and still holds all the shares. Big winner for them.

Warburg Pincus was the sponsor.  I've tracked a number of Warburg Pincus companies that have done very well after ipo, so I watch for them now. Don't want to make the same mistake again.

If you are sure that these guys have a huge moat and will grow earnings or cash flow a share by > 10%, then a 20x multiple can be cheap imo.

It's interesting to read these posts from 2013, where 20x is considered an acceptable hurdle that most of us would consider expensive. I've certainly come to appreciate the hidden value of ~25x EPS on strong, sustainable growth, but I wonder what folks would substitute for 20x in the earlier quote in today's environment. TDG is currently around 60x TTM EPS.

I recognize much of the bump in P/E is the substantial increase in debt/interest expense, so the relative increase in EV/EBIT is less so. The downside of course is the significantly reduced margin for error in business execution introduced by the debt load.

GAAP EPS is not the metric to use with acquisitive companies like this. VRX doesn't have a PE of 75x either. Look at FCFx or at least the company's adjusted cash EPS. TDG has been trading between 20-25x FCF lately.
Title: Re: TDG - Transdigm
Post by: jschembs on May 14, 2015, 07:34:24 AM
It's essentially a rollup compny of avionics, aviation, and tech parts manufcturers. I looked at it shortly after their ipo in 2007 and passed :(. They weren't cheap then either, and based on there moat and fcf I don't think they will get cheap.  Alan Fournier of Pennant bought them early on and still holds all the shares. Big winner for them.

Warburg Pincus was the sponsor.  I've tracked a number of Warburg Pincus companies that have done very well after ipo, so I watch for them now. Don't want to make the same mistake again.

If you are sure that these guys have a huge moat and will grow earnings or cash flow a share by > 10%, then a 20x multiple can be cheap imo.

It's interesting to read these posts from 2013, where 20x is considered an acceptable hurdle that most of us would consider expensive. I've certainly come to appreciate the hidden value of ~25x EPS on strong, sustainable growth, but I wonder what folks would substitute for 20x in the earlier quote in today's environment. TDG is currently around 60x TTM EPS.

I recognize much of the bump in P/E is the substantial increase in debt/interest expense, so the relative increase in EV/EBIT is less so. The downside of course is the significantly reduced margin for error in business execution introduced by the debt load.

GAAP EPS is not the metric to use with acquisitive companies like this. VRX doesn't have a PE of 75x either. Look at FCFx or at least the company's adjusted cash EPS. TDG has been trading between 20-25x FCF lately.

I understand FCF is better because of intangible amortization and other GAAP peculiarities, but TDG for example is trading at roughly the same EV/FCF multiple as it was in 2011, with FCF roughly 2x 2011 levels, net debt/EBITDA roughly 25% higher, with the cycle four years further along its curve. Perhaps folks believe aircraft is no longer a cyclical industry, and the future is bright enough to support those levels.
Title: Re: TDG - Transdigm
Post by: Liberty on May 14, 2015, 07:42:49 AM
I understand FCF is better because of intangible amortization and other GAAP peculiarities, but TDG for example is trading at roughly the same EV/FCF multiple as it was in 2011, with FCF roughly 2x 2011 levels, net debt/EBITDA roughly 25% higher, with the cycle four years further along its curve. Perhaps folks believe aircraft is no longer a cyclical industry, and the future is bright enough to support those levels.

TDG isn't Boeing. What matters isn't how many aircrafts are sold in the short-term. What matters to TDG is RPM (revenue-passenger-mile), because they make the vast majority of their FCF on the aftermarket for their vast installed based with lifecycles measured in decades. What also matters is if they can maintain or improve their content % on new platforms, which they have been doing. RPM is a relatively non-cyclical thing which barely dipped after 9/11 and the GFC of 2008-2009, and has been growing mid-single-digit the rest of the time.

TDG makes relatively little to OEM sales, and even loses some money by providing parts while new platforms are in development. The aftermarket is where it's at.
Title: Re: TDG - Transdigm
Post by: jschembs on May 14, 2015, 07:50:31 AM
I understand FCF is better because of intangible amortization and other GAAP peculiarities, but TDG for example is trading at roughly the same EV/FCF multiple as it was in 2011, with FCF roughly 2x 2011 levels, net debt/EBITDA roughly 25% higher, with the cycle four years further along its curve. Perhaps folks believe aircraft is no longer a cyclical industry, and the future is bright enough to support those levels.

TDG isn't Boeing. What matters isn't how many aircrafts are sold in the short-term. What matters to TDG is RPM (revenue-passenger-mile), because they make the vast majority of their FCF on the aftermarket for their vast installed based with lifecycles measured in decades. What also matters is if they can maintain or improve their content % on new platforms, which they have been doing. RPM is a relatively non-cyclical thing which barely dipped after 9/11 and the GFC of 2008-2009, and has been growing mid-single-digit the rest of the time.

TDG makes relatively little to OEM sales, and even loses some money by providing parts while new platforms are in development. The aftermarket is where it's at.

Fair enough - as you can tell, I haven't spent much time on the name, so the cyclical point seems off base. But is mid single-digit growth worth 25-30x FCF? Guess that's the "Platform Value" of future anticipated acquisitions.
Title: Re: TDG - Transdigm
Post by: jschembs on May 14, 2015, 07:56:17 AM
I understand FCF is better because of intangible amortization and other GAAP peculiarities, but TDG for example is trading at roughly the same EV/FCF multiple as it was in 2011, with FCF roughly 2x 2011 levels, net debt/EBITDA roughly 25% higher, with the cycle four years further along its curve. Perhaps folks believe aircraft is no longer a cyclical industry, and the future is bright enough to support those levels.

TDG isn't Boeing. What matters isn't how many aircrafts are sold in the short-term. What matters to TDG is RPM (revenue-passenger-mile), because they make the vast majority of their FCF on the aftermarket for their vast installed based with lifecycles measured in decades. What also matters is if they can maintain or improve their content % on new platforms, which they have been doing. RPM is a relatively non-cyclical thing which barely dipped after 9/11 and the GFC of 2008-2009, and has been growing mid-single-digit the rest of the time.

TDG makes relatively little to OEM sales, and even loses some money by providing parts while new platforms are in development. The aftermarket is where it's at.

Fair enough - as you can tell, I haven't spent much time on the name, so the cyclical point seems off base. But is mid single-digit growth worth 25-30x FCF? Guess that's the "Platform Value" of future anticipated acquisitions.

Speaking of Platform Value, I see they just acquired Pexco from Saw Mill Capital :)
Title: Re: TDG - Transdigm
Post by: Liberty on May 14, 2015, 07:58:26 AM
I understand FCF is better because of intangible amortization and other GAAP peculiarities, but TDG for example is trading at roughly the same EV/FCF multiple as it was in 2011, with FCF roughly 2x 2011 levels, net debt/EBITDA roughly 25% higher, with the cycle four years further along its curve. Perhaps folks believe aircraft is no longer a cyclical industry, and the future is bright enough to support those levels.

TDG isn't Boeing. What matters isn't how many aircrafts are sold in the short-term. What matters to TDG is RPM (revenue-passenger-mile), because they make the vast majority of their FCF on the aftermarket for their vast installed based with lifecycles measured in decades. What also matters is if they can maintain or improve their content % on new platforms, which they have been doing. RPM is a relatively non-cyclical thing which barely dipped after 9/11 and the GFC of 2008-2009, and has been growing mid-single-digit the rest of the time.

TDG makes relatively little to OEM sales, and even loses some money by providing parts while new platforms are in development. The aftermarket is where it's at.

Fair enough - as you can tell, I haven't spent much time on the name, so the cyclical point seems off base. But is mid single-digit growth worth 25-30x FCF? Guess that's the "Platform Value" of future anticipated acquisitions.

RPM are growing at mid-single digit. TDG's FCF/share can grow much faster than that, as it has.

They are very adept at using leverage, which I think makes sense because of the stability of their cashflows (these sole-source, proprietary, regulated aftermarket parts on platforms that fly for decades are kind of like growing annuities), have a multi-decade track record of M&A and operational excellence (they are very good at increasing margins at the companies they buy), and they aren't afraid of shrinking the equity with buybacks and special dividends when they have excess capital.
Title: Re: TDG - Transdigm
Post by: Liberty on May 14, 2015, 07:59:02 AM
Speaking of Platform Value, I see they just acquired Pexco from Saw Mill Capital :)

Yep, they deployed 1.3bn in the past 90 days :)

Update: New presentation: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTgxMDI3fENoaWxkSUQ9Mjg2NjM4fFR5cGU9MQ==&t=1
Title: Re: TDG - Transdigm
Post by: muscleman on May 14, 2015, 09:08:18 AM
How do guys get the FCF number for TDG? I don't think Opex cash flow minus capex makes sense here because the acquisitions will exaggerate Opex cash flow.
When I pay 1 bn to acquire a company, I have 1 bn cash outflow in investing cash flow section, and I will get more opex cash flow from the acquired's account receivable.

Does EBITDA minus interest tax and capex make more sense for the approximation of FCF? I wonder if a portion of the investing cash outflow for acquisitions should also be deducted from the above. Thoughts?
Title: Re: TDG - Transdigm
Post by: portfolio14 on May 18, 2015, 10:04:42 PM
Thinking about the downside here.

Most of TDG value is in the distant future, in the order decades, relying on annuity-like contracts.

My question is: how will these contracts play out if an airline goes bankrupt? How do you handicap this?

I'm not very familiar with bankruptcy laws. In a chapter 11 situation, (1) am i right that the contracts signed pre-petition can be voided? (2) Once post-petition, can the judge force a supplier (i.e. TDG) to provide ongoing services without getting paid? (3) If an aircraft is sold, I think TDG has to renegotiate a new contract with the buyer. Correct?

Another complication is, US bankruptcy laws don't apply to international airlines, right?

Title: Re: TDG - Transdigm
Post by: Liberty on May 19, 2015, 04:16:40 AM
Thinking about the downside here.

Most of TDG value is in the distant future, in the order decades, relying on annuity-like contracts.

My question is: how will these contracts play out if an airline goes bankrupt? How do you handicap this?

I'm not very familiar with bankruptcy laws. In a chapter 11 situation, (1) am i right that the contracts signed pre-petition can be voided? (2) Once post-petition, can the judge force a supplier (i.e. TDG) to provide ongoing services without getting paid? (3) If an aircraft is sold, I think TDG has to renegotiate a new contract with the buyer. Correct?

Another complication is, US bankruptcy laws don't apply to international airlines, right?

All airlines would have to ground their planes at the same time to have an effect, just 1 wouldn't be material (and they also have a decent chunk coming from defense), and as far as I know, except maybe on pilot strikes, planes keep flying. High fixed cost companies don't want to ground their assets.

But also remember that the cost of TDG's parts are very small compared to the overall maintenance and operational costs of flying airplanes. We're talking about small parts that are replaced every so often. Almost immaterial compared to fuel costs, the cost of pilots, the cost of engines, etc. That's part of why they have pricing power, most of their parts are below the radar financially but are crucial if you want to fly.
Title: Re: TDG - Transdigm
Post by: loganc on May 19, 2015, 06:47:56 PM
Liberty,

What are the material risk factors here?  What would change your mind about this company?

I certainly see potential risks in terms of the acquisitions (e.g. acquisition of inferior businesses relative the current "base" businesses), interest rates, and "key man" risk with Howley.

Thanks.

 Edit:

I want to make sure that it is clear that I believe TDG to be a very high quality business.  I am just trying to get a better sense of the true risk factors to the *business* because it is really hard to see them.  In a perverse sense, the fact that I can't figure out something that kills this business scares me because I feel like I am missing something.

Title: Re: TDG - Transdigm
Post by: Schwab711 on May 19, 2015, 09:19:25 PM
Liberty,

What are the material risk factors here?  What would change your mind about this company?

I certainly see potential risks in terms of the acquisitions (e.g. acquisition of inferior businesses relative the current "base" businesses), interest rates, and "key man" risk with Howley.

Thanks.

 

The risk is that Boeing and Airbus use a different primary supplier for their new planes (or use TDG as primary less often). I think the reverse as is actually occurring at the moment.

Also, King of the Hill quote somewhat describes the pricing power (initial cost is a sweetheart deal so Boeing passes TDG's profits on to future plane owners since Boeing/Airbus makes better value planes than anyone else.

LIEUTENANT: I wish this bill were a mistake, Mr. Hill, but that is how much it costs the Army to give someone a haircut. We spend $80,000 for each military-grade barber chair. The French make a barber chair that costs $110,000. It's a damn good chair, but I'm not gonna spend $110,000 for a barber chair.
HANK: Wasting all that money is like buying a haircut for Saddam Hussein. And I hate Saddam Hussein! I like his haircut, but that's it.
LIEUTENANT: Look, I know the chair's too much at $80,000, but then they give us a B-2 bomber for 1.3 billion. That's where we make it up. (beat) Well, you try getting a B-2 bomber for 1.3 billion. You can't do it.

http://geocitiessites.com/arlen_texas/badhair.htm (somehow I couldn't get a video and geocities was my best option!)
Title: Re: TDG - Transdigm
Post by: loganc on May 19, 2015, 09:37:36 PM
The risk is that Boeing and Airbus use a different primary supplier for their new planes (or use TDG as primary less often). I think the reverse as is actually occurring at the moment.

Nice quote - I am a big Mike Judge fan. 

So, how do you know that the reverse is happening at the moment?

Edit: Also, how do you think about interest rate risk here, given the capital structure?
Title: Re: TDG - Transdigm
Post by: giofranchi on May 20, 2015, 12:15:45 AM
What are the material risk factors here?

I think the greatest uncertainty with this kind of businesses, which make lots of acquisition with lots of debt, is that sooner or later the man at the wheel commits a major mistake…

Such a risk is not "old fashioned" at all, like Ackman has recently called Munger, but imo it never goes "out of style" and therefore is very real indeed!

On the other hand, the men at the helm of these so-called "platform companies" tend to be very disciplined and to never stray outside their circle of competence. And this clearly diminish the risk of any major mistake. ;)

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Schwab711 on May 20, 2015, 12:30:29 AM
The risk is that Boeing and Airbus use a different primary supplier for their new planes (or use TDG as primary less often). I think the reverse as is actually occurring at the moment.

Nice quote - I am a big Mike Judge fan. 

So, how do you know that the reverse is happening at the moment?

Edit: Also, how do you think about interest rate risk here, given the capital structure?

In general, corporate clients or after-market parts distributors prefer to work with as few suppliers as possible. If you can just pay GE and TDG instead of 40 different suppliers than you might pay a slight premium for the convenience. There has been significant consolidation in aircraft part suppliers since 2008/2009 with just a few large companies remaining. TDG has the largest % of specialty/unique/sole-source required parts (however you want to classify their advantage, they prefer sole-source) of the industry players. Mgmt has stated or hinted at this being the case whenever discussing their strategy of bolt-on acquisitions. Their goal seems to be to supply as many parts as possible for each type of aircraft. They also seem to be seeking out specific types of aircraft like some of the most common Boeing planes.

With recent acquisitions the debt coverage levels are relatively high but they have very predictable short-term revenue/profits that makes it easy to whether these periods of high leverage as long as they don't compound the problem. If we see mgmt pay off debt over the next 12-18 months then we should have a better idea of their risk tolerance and what they think the ideal long term leverage ratio should be (I think they've guided on this before so I have to check my notes).

I think changes to current US regulations (deregulation or less oversight) or operational mistakes are the largest risks. Technically they could find a fatal design flaw with the B737, B777, A320, or A330/A340 and ground all models (very unlikely) or leave TDG out of the design process of future models. Again, this is unlikely considering that TDG is a lead supplier for the B787 Dreamliner. One might also think they could run out of acquisition candidates, but the most important assets they have are customer relations or preferences and past acquisitions were meant to fortify their position as the preferred main supplier for the highest-volume new aircraft models. They could even realistically maintain/gain market share without a single additional order (though it can lower risk and hasten the process if done prudently). I don't see these as too likely but who knows.
Title: Re: TDG - Transdigm
Post by: Liberty on May 20, 2015, 07:02:09 AM
Liberty,

What are the material risk factors here?  What would change your mind about this company?

I certainly see potential risks in terms of the acquisitions (e.g. acquisition of inferior businesses relative the current "base" businesses), interest rates, and "key man" risk with Howley.

Thanks.

 Edit:

I want to make sure that it is clear that I believe TDG to be a very high quality business.  I am just trying to get a better sense of the true risk factors to the *business* because it is really hard to see them.  In a perverse sense, the fact that I can't figure out something that kills this business scares me because I feel like I am missing something.

I think you have most of the big ones. Howley's great, but he also seems to have built a really good team and culture, so I'm don't think things would necessarily go down the drain if he was gone. The existing businesses would almost certainly keep chugging along, the question would be on the M&A front and how clever they are at optimizing the capital structure. To me that falls more into the "less upside" than the "big downside" bucket.
Title: Re: TDG - Transdigm
Post by: Liberty on May 20, 2015, 07:25:00 AM
So, how do you know that the reverse is happening at the moment?

They periodically disclose how much content they have on various airframes, and the numbers seem to be going up with new ones. The numbers also go up over time with acquisitions, of course.

Here's a recent slide:

(http://i.imgur.com/R5qVbVI.jpg)

The note at the bottom says that these numbers don't include the acquisitions since june 2013, so the actual numbers are higher.
Title: Re: TDG - Transdigm
Post by: loganc on May 20, 2015, 11:37:55 AM
Really appreciate all of the feedback Schwab and Liberty.  This is all really helpful.
Title: Re: TDG - Transdigm
Post by: Phaceliacapital on May 21, 2015, 02:07:15 AM
So, how do you know that the reverse is happening at the moment?

They periodically disclose how much content they have on various airframes, and the numbers seem to be going up with new ones. The numbers also go up over time with acquisitions, of course.

Here's a recent slide:

(http://i.imgur.com/R5qVbVI.jpg)

The note at the bottom says that these numbers don't include the acquisitions since june 2013, so the actual numbers are higher.

Do you know if PCP provides these kind of graphs?
Title: Re: TDG - Transdigm
Post by: Liberty on May 21, 2015, 05:26:51 AM
Not sure, I haven't looked at PCP in a little while.
Title: Re: TDG - Transdigm
Post by: orion on May 21, 2015, 06:01:43 AM
Quote
"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."
The backlog has never been that long before, Arment said. "It's usually been only a few years."

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full
Title: Re: TDG - Transdigm
Post by: Jurgis on May 21, 2015, 10:26:58 AM
Quote
"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."
The backlog has never been that long before, Arment said. "It's usually been only a few years."

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full

And what comes at the end of supercycle?  ;)
Title: Re: TDG - Transdigm
Post by: Liberty on May 21, 2015, 10:30:24 AM
Quote
"It's the largest cycle in the aerospace industry we have ever seen," Sterne Agee CRT analyst Peter Arment told IBD. "Boeing and Airbus have eight-year order backlogs totaling over 12,000 planes."
The backlog has never been that long before, Arment said. "It's usually been only a few years."

http://news.investors.com/business-industry-snapshot/051515-752854-aerospace-climbs-into-a-supercycle.htm?p=full

And what comes at the end of supercycle?  ;)

All those planes keep flying for decades and require parts. TDG doesn't make its money on OEMs anyway.

Unless you don't think the Chinese and Indians and Brazilians and Indonesians, etc, have as much a desire to fly as everyone else, I don't think RPMs are going down any time soon.
Title: Re: TDG - Transdigm
Post by: giofranchi on June 04, 2015, 07:43:18 AM
I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Liberty on June 04, 2015, 08:09:33 AM
I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

Cheers,

Gio

Welcome to the club :)
Title: Re: TDG - Transdigm
Post by: muscleman on June 04, 2015, 08:40:44 AM
I have just established an 8% position, which I will gradually increase over time, or aggressively increase should the stock price decline.

I like the fact TDG is the most successful of the so-called “platform companies” not owned by Ackman yet. Therefore, no direct correlation to my PSH investment.

Cheers,

Gio

Hi Gio,
    What's your valuation on TDG? It seems to me that the FCF multiple is close to 20 but the FCF annual increase rate is only in the 8-10% range.
Title: Re: TDG - Transdigm
Post by: giofranchi on June 04, 2015, 09:26:20 AM
Hi Gio,
What's your valuation on TDG? It seems to me that the FCF multiple is close to 20 but the FCF annual increase rate is only in the 8-10% range.

Well, I think something of this quality should trade around at least 20 x Adjusted EPS. Right now it is trading at 26x. They have increased revenues at a CAGR of 20.5% for many years and I think their market is large enough to go on increasing them at a similar annual rate for many more years into the future. Adjusted EPS should follow suit.
If they compound Adjusted EPS at 20% and 10 years from now TDG is trading at 20x, my annual return would be 20 x 0.75 = 15% compounded annual.

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: mateo999 on June 04, 2015, 10:29:45 AM
I posted this a few minutes ago in the PCP thread, but thought some following dig'm might care...

When hearing a pitch on PCP in April, Ackman asked about 3D printing as a "when, not if" type disruptor to the business.  Those doing the pitching brushed off the notion essentially as ridiculous.  This comes to mind:

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

-Bill Gates


And so it begins (from Bloomberg this morning):

EasyJet to Use Drones to Inspect Jets, Mulling 3-D-Printed Parts
By Benjamin Katz and Kari Lundgren
(Bloomberg) -- EasyJet Plc said it will begin using drones to inspect jets on the ground starting next year and is experimenting with the 3-D printing of replacement parts as it pursues innovations to keep costs down.  The airline said it has succeeded in using a drone to inspect one of its planes and will roll out the robots at engineering bases over the next 12 months. The technology is intended to trim the number of hours jetliners are out of service, the Luton, England-based company said in a statement.

Europe’s second-biggest discount carrier is looking for ways to use technology to cut costs and trim delays caused by mechanical failures. Technologies under development include three-dimensional printing to replace cabin parts such as armrests, reducing repair times and the need for storage space, and in-flight troubleshooting of technical problems in conjunction with Airbus Group SE, which supplies its planes.

“We have made great strides on our work with drone technology,” Chief Executive Carolyn McCall said in the statement, adding that EasyJet is continuing to “look for new and original innovations to help run our operation smoothly.”

Drones could be used to pick up damage caused by a lightning strike, the kind of incident that can require a full day of inspections. An overnight delay can cost as much as 15,000 pounds ($23,133), EasyJet has said.
Title: Re: TDG - Transdigm
Post by: Liberty on June 04, 2015, 11:12:45 AM
I think this could affect PCP more than TDG. If someone ever 3D-prints TDG's stuff, it's likely to be TDG. They own the IP and the only certification for most of what they sell, and most of what they make is under-the-radar because they are small, low-cost parts (not big sexy engine blades or whatever).
Title: Re: TDG - Transdigm
Post by: fisch777 on June 04, 2015, 12:44:40 PM
I think it is more likely that 3D printing disrupts high-margin aftermarket replacement parts than the primarily-OEM parts PCP is producing.  3D makes sense when low-volume, quick production is paramount versus cost, not in planned production lines.  ~85% of PCP sales are OEM.  In fact, making cheaper aftermarket replacement parts by copying "proprietary" IP is exactly what Heico has been doing for years.  Heico reverse engineers proprietary parts made by Pratt, GE, etc and then gets them PMA-certified.  At least in developed countries, it would be illegal to 3D print a replacement part to install on an aircraft without PMA (or similar) certification that can take 1-2 years.

I can see some disruption possible on the fastener side, but large cast & forged parts are unlikely to be duplicated by a printer.  You can also bet both TDG and PCP are investing in this already.
Title: Re: TDG - Transdigm
Post by: giofranchi on June 05, 2015, 01:08:05 AM
Welcome to the club :)

Actually, I have changed my mind… It is not the price at all: I think it is not cheap, but neither too expensive. Imo a fair price to open a new position leaving some room to average down.

What bothers me instead is exactly what bothered me with VRX: I cannot easily find organic growth results. Therefore, I cannot easily assess the performance of all the businesses they have bought and keep on buying, after they have been acquired.

Liberty,
You have followed TDG for a long time now: could you help me get a clearer picture of their organic growth? I know their aim is Organic EBITDA Growth around 10-12%, but what are the metrics you are looking at to monitor how Organic EBITDA is actually growing?

I like TDG very much, but without the certainty I am able to understand their business results correctly, I must watch it from the sidelines, just like I watched VRX from the sidelines for a while.

Thank you!

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on June 05, 2015, 06:29:45 AM
Quote
Organic net sales grew approximately 8%
--Nicholas Howley, 2014 Annual Letter

Very good! :)

Is there a place they show organic growth in a more systematic way than the annual letter?

Thank you,

Gio
Title: Re: TDG - Transdigm
Post by: cmlber on June 05, 2015, 06:42:49 AM
Quote
Organic net sales grew approximately 8%
--Nicholas Howley, 2014 Annual Letter

Very good! :)

Is there a place they show organic growth in a more systematic way than the annual letter?

Thank you,

Gio

Every quarter in the quarterly results presentation they have a slide showing organic revenue growth for the quarter by segment and a slide showing FY outlook.  Slides 6 and 7 of the most recent quarters presentation.  You can back into what that translates to in terms of organic EBITDA growth by taking revenue growth times gross margin over last years EBITDA.
Title: Re: TDG - Transdigm
Post by: Liberty on June 05, 2015, 06:51:21 AM
Welcome to the club :)

Actually, I have changed my mind… It is not the price at all: I think it is not cheap, but neither too expensive. Imo a fair price to open a new position leaving some room to average down.

What bothers me instead is exactly what bothered me with VRX: I cannot easily find organic growth results. Therefore, I cannot easily assess the performance of all the businesses they have bought and keep on buying, after they have been acquired.

Liberty,
You have followed TDG for a long time now: could you help me get a clearer picture of their organic growth? I know their aim is Organic EBITDA Growth around 10-12%, but what are the metrics you are looking at to monitor how Organic EBITDA is actually growing?

I like TDG very much, but without the certainty I am able to understand their business results correctly, I must watch it from the sidelines, just like I watched VRX from the sidelines for a while.

Thank you!

Gio

You are selling your 8% position the day after buying it?  ???

They sometimes break down organic growth, and sometimes do a pro-forma of revenues by sector excluding recent acquisitions, but you mostly have to infer it yourself by keeping track of acquisitions.

As long as I can keep an eye on organic growth once in a while, I don't mind not having an update every quarter. It would be nice to have it conveniently packaged at frequent intervals, but I tend to trust their track record on that front. With RPMs growing faster than GDP, they'd really have to screw things up to not get a lift from that.
Title: Re: TDG - Transdigm
Post by: giofranchi on June 05, 2015, 06:55:00 AM
Every quarter in the quarterly results presentation they have a slide showing organic revenue growth for the quarter by segment and a slide showing FY outlook.  Slides 6 and 7 of the most recent quarters presentation.  You can back into what that translates to in terms of organic EBITDA growth by taking revenue growth times gross margin over last years EBITDA.

Thank you very much! Very helpful! :)

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on June 05, 2015, 07:01:28 AM
You are selling your 8% position the day after buying it?  ???

 ;D ;D

No, actually I thought I was going to, but hadn’t pulled the trigger yet… Evidently, I was still a bit uncomfortable…
Now I will go back many quarters and check if they systematically disclose organic growth in revenues by sectors like you and cmlber have suggested… That would be great!

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on June 08, 2015, 07:00:51 AM
This time I have truly pulled the trigger! ;D

And I have opened an 11% new position in TDG.

Besides the fact of TDG being the most successful “platform company not owned by PSH”, also debt imo is not really too much of a concern: 1) they seem to be able to deleverage quite rapidly, if they want to, 2) debt seems to be a “choice” more than a necessity: much of the recent increase in debt was due to the payment of a special dividend to shareholders.
Howley clearly consider TDG’s capital structure as a mean to create shareholders’ value, and I am confident he keeps adjusting it for the better.

I now plan to use part of my monthly free cash to increase my TDG investment.

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: abyli on June 08, 2015, 07:24:02 AM
Gio:

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with higher growth, with a little debt and fantastic president.

Bing
Title: Re: TDG - Transdigm
Post by: giofranchi on June 08, 2015, 07:27:42 AM
Gio:

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with even higher growth, fantastic president.

Bing

Is there a thread about Constellation Software? I agree its president is fantastic, but don't know much about the company yet. A thread on this board would be very useful! ;)

Gio
Title: Re: TDG - Transdigm
Post by: Liberty on June 08, 2015, 07:45:24 AM
Gio:

If you like TDG so much, why do not you buy Constellation Software (CSU)? Similar P/E multiples with even higher growth, fantastic president.

Bing

Is there a thread about Constellation Software? I agree its president is fantastic, but don't know much about the company yet. A thread on this board would be very useful! ;)

Gio

There you go:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/csu-constellation-software/

CSU has been one of my faves for a few years. Never really talked about it before around here, but since there's discussion about it bubbling up, might as well make a thread :)
Title: Re: TDG - Transdigm
Post by: Liberty on July 28, 2015, 03:13:32 PM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2071953

One more...
Title: Re: TDG - Transdigm
Post by: Schwab711 on July 28, 2015, 04:24:09 PM
My biggest problem with TDG is whether conservative expected returns are 8%-10%. They've won contracts for nearly all of the highest-volume Boeing models lately (including their large bet on the Dreamliner's success). Thanks for posting these.

TDG's PneuDraulics acquisition is continuing a trend of increasing the % of parts supplied for aircraft instead of diversifying into different models (concentrating their revenue streams - I believe this is why results have been so exceptional). PneuDraulics's parts are used on the Boeing 787 (Dreamliner), Dassault 7X, Gulfstream G450/G550, and Gulfstream G650 (to name a few). These are pretty enviable designs to be supplying.
http://www.pneudraulics.com/products/custom.aspx

What's interesting to me is how heavily TDG has bet on the success of the 787 Dreamliner while still producing such outstanding results.  If you think the 787 will ultimately be commercially successful then TDG is a no-brainer buy (it has huge advantages in fuel efficiency, capacity, and value over any currently available aircraft design). Their continued earnings growth is in spite of the Dreamliner's repeated delays and failures. They supply a significant % of the total replacement parts for the Dreamliner, which represents investments of $100's mm that are barely contributing to total sales. TDG looks like a better company every time I learn something about them.
Title: Re: TDG - Transdigm
Post by: giofranchi on August 04, 2015, 04:28:13 AM
Quote
TransDigm Group Reports Fiscal 2015 Third Quarter Results

CLEVELAND, Aug. 4, 2015 /PRNewswire/ -- TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, today reported results for the third quarter ended June 27, 2015.

Highlights for the third quarter include:
•Net sales of $691.4 million, up 13.2% from $610.6 million;
•EBITDA As Defined of $312.9 million, up 13.5% from $275.6 million;
•Net income of $99.1 million, up 512.6% from $16.2 million;
•Earnings per share of $1.75, up from a loss per share of $1.66;
•Adjusted earnings per share of $2.26, up 11.9% from $2.02; and
•Upward revision to fiscal 2015 sales, EBITDA As Defined and adjusted earnings per share guidance.

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2075297


Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on August 04, 2015, 04:43:27 AM
http://seekingalpha.com/news/2688325-transdigm-group-misses-by-0_01-misses-on-revenue?app=1&uprof=25

Missed on revenues, but still a solid quarter imo. With 2.6% organic growth.

Gio
Title: Re: TDG - Transdigm
Post by: Liberty on August 04, 2015, 05:22:12 AM
What do you mean, "missed"? Are you into the analyst game now ;)

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2075297

Quote
Net sales of $691.4 million, up 13.2% from $610.6 million;
EBITDA As Defined of $312.9 million, up 13.5% from $275.6 million;
Net income of $99.1 million, up 512.6% from $16.2 million;
Earnings per share of $1.75, up from a loss per share of $1.66;
Adjusted earnings per share of $2.26, up 11.9% from $2.02; and
Upward revision to fiscal 2015 sales, EBITDA As Defined and adjusted earnings per share guidance.
Title: Re: TDG - Transdigm
Post by: giofranchi on August 04, 2015, 05:35:07 AM
What do you mean, "missed"? Are you into the analyst game now ;)

No no! ;D ;D

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Schwab711 on August 15, 2015, 01:58:26 PM
Again, probably stupid question, but how do you guys think about the debt structure here?  So, they did 450MM @ 6.5% due 2025.  As of 12/31/14 there is 3.9B of term loans.  Is it not a significant risk to not term out some of the term loan?   It seems like the Malone entities are working towards fixed rate leverage (e.g. SIRI balance sheet and the recent refinancings at VM).

I didn't really think about this question at first, but I think it might be more telling than I first thought. It seems like they have made a point to long-date their debt as much as possible over the last 24 months (at least one other recent offering was single-dated long-term) vs. more diversified terms. This move could be a simply interest rate bet or possibly related to when they expect to see after-market sales for dreamliners and the recent 777x models. I don't know the actual answer, but I'd guess internal treasury expectations are at least partially the reason (maybe this is overly optimistic).

As for EBITDA between OEM and after-market, I rechecked the annual reports and I did not see the actual mix either.


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)

Since some folks have asked, here are some similar companies to TDG:
SPR (96% of rev from sole-source parts - somehow Morningstar doesn't think there is any moat here?)
TGI
Title: Re: TDG - Transdigm
Post by: Liberty on September 08, 2015, 04:33:30 PM
http://bearofburrardstreet.com/recent-transaction-purchased-transdigm-tdg/
Title: Re: TDG - Transdigm
Post by: Larry on October 13, 2015, 07:54:51 AM
Hello,

I have been reading this board for couple of years but only managed to register now. Im in my early 20's but have been investing for some years. I've had fairly large position in Transdigm for couple of years and have been following the company quite closely. This has been a very good thread so I hope to get to share some thoughts from now on as well. Some of my observations:

- The company is very well managed. I think Nick Howley is a very unique CEO and the management team as whole is experienced. Its true that COO Ray Laubenthal and CFO Greg Rufus decided to retire lately, but I wouldnt take too much of it. First of all, if im not mistaken Mr Laubenthal had been with the company from the very beginning (1993) and Mr Rufus had been with them for about 15 years, so like someone mentioned before its not like theyre running away. Laubenthal is also staying in board and he holds quite a lot of stock. There has been couple of high caliber external hires like Terry Paradie, but im sure they've done quite a lot of work regarding the recruitment, I was too a bit scared when I read of the Cliff's background (like Liberty mentioned).

- Im quite bullish about the future of air traffic. I think there is a huge runway. North America and Europe are probably not growing as fast, but there is a huge amount of countries with very high population and growing economies, just think of countries like Indonesia (population of 250m), not mentioning more well known emerging nations with large population. I see no reason why they wouldnt fly that much. Its true that there are going to be bumps on the road like we've had (9/11, global recession) but I think theres a lot of space just for the market growth. Airbus and Boeing both have some very interesting forecasts for air traffic growth for couple of decades. Considering this, I think Transdigm is going to do well. If we get 5% rpm growth (which I think is quite midpoint and might even be abit conservative) and put some pricing on top of that, you'll get to ~10% commercial aftermarket growth or atleast very close to that

- They've managed their acquisitions well. The point is not to buy these companies with high ebitda margins. The point is how to get the margins to grow and double one day. Like Howley has said they have no problems buying stuff that have low margins, of course it has to have high content of commercial aftermarket business and the products have to be proprietary, they are strict with this and I like that alot. So I prefer to see them do acquisitions if and when the m&a pipeline is reasonable.

- Considering recent acquisitions, they've been quite busy. Telair was fairly sizable one with 300m revenue and 60m EBITDA, they stated it most likely wont get all the way up to Transdigm average margins, but Im sure there still value. Then there were Pexco, Franke (smaller one) and now recently the PneuDraulics they just closed. So they've now deployed over 1,5b this year so far. So far they're all performing well according to last conference call (PneuDraulics hadnt closed at that time yet)

- About valuation. Some say TDG is quite expensive at there prices and I might agree on this. Im holding for the long term so I dont tend to think too much about this. Im sure if they do alright, I will get ok returns. Next year theres going to be quite nice growth because of the acquisitions. Some calculations: Year ago, they guided 2550m revenue for FY15, their FY ended in september. (so this guidance was without any acquisitions). If they are about at this point without the acquisitions, and the core grows at conservative 6% organic growth, we have about 2700m for the core TDG for FY16, then adding recent acquisitions, they dont disclose all the financials of the deals so have to try estimate some of them).  This is a bit hard but just throwing some numbers around, they are not meant to be precise at all, but I get them to somewhere around 3300m revenue with all the closed acquisitions (Telair was the only one of which they disclosed the financials). There's dilution to the margins from the acquisitions, but if they achieve 45% EBITDA as defined for the whole group for FY16 (and this might be conservative depending on how quickly the margins of new acquisitions move up, without this year's acquisitions, EBITDA as defined was about 47% last q if I recall correctly), thats 0,45x3300 = 1485m EBITDA as defined for FY16. Now in last investor day presentation there was a slide which showed their Free cash flow has been around 50% of EBITDA as defined, they're quite leveraged right now, but lets use 46%. 0,46x1485 would be 683 free cash flow for FY16. They have 56,6m shares outstanding right now, lets assume that goes up to 57,3m from the compensation, that would be 683/57,3 = 11,92 Free cash flow/share. With this, Price/FCF is about 18,6 (forward). Its not low but its not too extreme I think considering the quality of the company. Theyre quite leveraged right now (6,0), but assuming theres no acquisitions or other capital market activities, they will delever fairly quickly. So I think their debt is now at about 8400m, theyre going to have about 1b of cash when their latest numbers come out, but take 325m off for Pneudraulics which closed last q, their net debt at end of FY15 is 7725m. If my numbers are around right, net debt at the end of FY16 is 7042, EBITDA as defined 1485, so net leverage a year from now would be 7042/1485 = 4,7. So that will move down quickly and will leave room for a lot of activities for example if they continue to see m&a opportunities.

- This is not meant to be any kind of estimate for anything, I was basically just playing with numbers and throwing them around, because thats what I like to do, just decided to share them. I tried to be conservative enough. There are also some tax benefits with Pexco and Pneudraulics, and honestly I just dont really know how to calculate them so its a very simple model.

- I think the leverage is what scares most people out of Transdigm. I have been thinking about it too. Nick is clearly very comfortable with high leverage. They've been doing this for a long time though. Im not going to write my thoughts on Valeant here (I own some Valeant stock), but TDG has been around for a quite some time now and operated with debt succesfully (even though not that long as a public company), just mentioning Valeant because theres a lot of concern regarding if they can handle the debt or not and there has been ups and downs for TDG, for example 9/11 and the recession and they've weathered through them. So there has been cycles. People sometimes point to super large backlogs of Boeing and Airbus and say what happens when that goes down. Well It doesnt really matter. OEM is not where TDG makes their money. Aftermarket is the one. It would require a very large event if air traffic would stop, note that the installed base of planes is all around the world, because the customers are the airlines. So I think you can trust that the aftermarket will be there and the installed base of planes will grow over time (and the lifecycle of an airplane is quite long). You just have to trust the management with the leverage, if you are not comfortable with that, its hard to be with Transdigm. I havent checked lately but I think there was some volatility in high yield bond market lately. This of course concerns me a bit but they have quite good maturities and they can decide to delever if they dont see the situation as good as before, when they levered up and paid special dividends.

- Regarding their products, theres the risk/reward play. These parts are relatively small part of the whole cost base of airliners (theres some info in the latest investors day presentation on this), I just dont see airliners trying to save money by turning to TDG and trying to find substitutes, usually there even aren't any subtititutes because they're sole source providers for many of the parts. I think Howley said in some CC that if you do your job well and be there for the customer, rarely will they change you. And coming to this, of course the pricing power is there.

- I honestly havent dug much information about others like Heico, so I dont know if TDG competes with for example Heico really,  so would be interesting to know if theres risk.

- Its true that there might be some keyman risk. Nick Howley has been with the company from the very beginning and has played central role in its success. He is a bit over 60 now so I think he is going to stick around for some time atleast and im sure when he moves, he will continue with the board. There are some younger people who have been with the company for quite some time and surely there is talent, thats part of their culture as well.

- I just very much like the way they operate. Here is a quote from Nick Howley from a very rare article which im going to link at the end of this post. "
Quote
Flying under the radar is the way Howley, a Philadelphia native and a mechanical engineer who earned his MBA at Harvard Business School, prefers to operate.

“Until 2006 when we went on the New York Stock Exchange and were forced to become more public, I don’t think anyone even knew our company existed,” Howley says matter-of-factly. “I still don’t think most people know it exists.”

Magazine interviews, he adds, are “something we simply don’t do.”


So it has been pleasure to read this board for couple of years and now finally join in. I have enjoyed many of the posts made by regular users here on Cobff. I seem to have quite similar thoughts with Liberty and I see that we share quite some of the ideas and general philosophy regarding to investing. I have been following Constellation Software for couple of months (thanks very much to you for the idea, I hadnt heard of the company before) and it seems a very well managed company. They have a lot of traits that I like. One very major difference to TDG is that it seems Mark Leonard doesnt really like to operate with leverage. I havent jumped in yet but its a very interesting company. I dont know IT industry that well. but it seems they have a lot of recurring revenue and thats a quality I like very much.

English is not my first language (I come from northern Europe) so I might do a lot of grammar mistakes, sorry for that, but just try to hang on.

Heres a very unique piece on Transdigm, I dont think this has been posted here before (if so, please excuse me): http://ibmag.com/Main/Archive/2014_Business_Hall_of_Fame_W_Nicholas_Howley_12704.aspx

The article covers a lot of philosophy of Howley and the way Transdigm operates, I think its a very interesting article.

Thank you a lot for reading and sharing your thoughts!

Title: Re: TDG - Transdigm
Post by: giofranchi on October 13, 2015, 08:18:21 AM
Im in my early 20's but have been investing for some years.

Wow! So young!... You have taken the snowball metaphor quite literally!! Good for you! ;)
Welcome to the board, and thank you for your first, very thoughtful post!

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Liberty on October 13, 2015, 09:03:31 AM
Quote
So it has been pleasure to read this board for couple of years and now finally join in. I have enjoyed many of the posts made by regular users here on Cobff. I seem to have quite similar thoughts with Liberty and I see that we share quite some of the ideas and general philosophy regarding to investing. I have been following Constellation Software for couple of months (thanks very much to you for the idea, I hadnt heard of the company before) and it seems a very well managed company. They have a lot of traits that I like. One very major difference to TDG is that it seems Mark Leonard doesnt really like to operate with leverage. I havent jumped in yet but its a very interesting company. I dont know IT industry that well. but it seems they have a lot of recurring revenue and thats a quality I like very much.

Great introductory post, Larry, welcome to the board!  :D

If you have any questions about CSU or anything else, feel free to private message me here or on Twitter and I'll do my best to help.

Out of curiosity, have you gone down the John Malone rabbit hole yet? (or is a spiderweb a better metaphor?)
Title: Re: TDG - Transdigm
Post by: Larry on October 13, 2015, 09:38:28 AM
Thank you to both of you for very warm welcomes! You can also reach me by pm if theres anything I can help or you want to discuss/know about, there isnt any kind of introduction board on Cobf so I just didnt know what to tell, just decided to post here as TDG is in my opinion a very interesting company and the one I think i've been following most closely.

Liberty: I have followed Malones "spiderweb" a bit for some time. He seems to be a very rational guy and I have enjoyed the interviews/videos I have seen of him online (there aren't that many). I also liked the piece of him on the "Outsiders" book, gave some good perspective on how TCI operated. However it is a very complex web and I have just followed it but havent jumped in. One thing as well that has prevented me is the tax code here in Finland, as there are spinoffs etc with Malone, im not entirely sure how is it with taxation so I have just felt it easier to pass. I have been following Sirius a bit and it seems well managed. They're producing tons of free cash flow and also growing nicely and buying back stock. Sometimes I have been thinking about buying in to Sirius, but havent done it. There can be different opinions but im not sure how ethical Malone would be towards minority holders (he's controlling Sirius through Liberty Media afterall). I have also followed Charter a bit and Tom Rutledge seems to have done some good work there. Maybe the closest I have come to Malone's companies is Directv (eventhough I think he had jumped out before I bought in 2 years ago, but it surely had Malones handprint regarding to capital allocation), I bought some stock of Directv in low 60's, they were growing (and I think still are) a lot in Latin america and Usa was producing tons of cash flow and at the same time they were buying a lot of stock (and levering modestly) and the stock traded at maybe 11 p/e. Sadly in next may At&T announced their plans to acquire the company, so I pocketed a nice gain but felt I would have enjoyed to see them as a stand alone company. Mike White did some great work at Dtv and bought back a lot of stock.

So yea, in short, Malone is an interesting guy but have decided to pass for now, there has been so much work even figuring out Valeant, altough you guys have had very good discussion and argumentation on that thread! But I will surely keep an eye on Malone and it will be interesting to see how Charter + twc plays out.
Title: Re: TDG - Transdigm
Post by: 60°North Investments on October 13, 2015, 10:27:15 AM
Off topic, just to reply to Larry regarding the Finnish taxation on spin-offs etc. You can google "arvopapereiden luovutusvoittojen verotus" and find the vero.fi page where those and other situations are covered quite well. I haven't found a tax reason to avoid investing in Malone co's.

Don't have anything to add to TDG other than thanks for the discussions people have had around it. An interesting company to buy especially in the next downturn.

-Another Finn in early 20s
Title: Re: TDG - Transdigm
Post by: handycap5 on October 13, 2015, 10:40:51 AM
thanks for the thoughtful writeup. i really liked the article you linked to (but isn't it a little funny to say he never does magazine interviews during a magazine interview?).

TDG looks like a great company! but i will be surprised if it turns out to be a great stock starting now. i am very surprised how expensive it is. for $1 of enterprise value, i get only 14 cents of revenue! and margins are already 40%! they are unlikely to go higher. in my view, at current prices, revenue growth has to continue for many years (either organic or M&A) at very rapid rates to not be impaired. and the last many years has been a perfect (good) storm for these types of companies: 1) growing aerospace build rates and volumes, which will be somewhere above normal next few years, even using the Airbus/Boeing figures you cite, 2) cheap and available debt, 3) high willingness to pay up for "platform" companies (i.e. the outsiders book, anything bill ackman says, rear view mirror for companies of this ilk: PCP, CSU, JAH, DHR, ROP etc.) which is "reflexive" and allows further accretive acquistions, locking in employees with stock comp, etc. etc.

things can continue (and i can certainly be wrong), but i'm guessing the person who shows up late to this party, either now or sometime in the future, is likely to be disappointed.

but what do i know? group, please tell me why i am wrong...
Title: Re: TDG - Transdigm
Post by: frommi on October 13, 2015, 11:06:59 AM
thanks for the thoughtful writeup. i really liked the article you linked to (but isn't it a little funny to say he never does magazine interviews during a magazine interview?).

TDG looks like a great company! but i will be surprised if it turns out to be a great stock starting now. i am very surprised how expensive it is. for $1 of enterprise value, i get only 14 cents of revenue! and margins are already 40%! they are unlikely to go higher. in my view, at current prices, revenue growth has to continue for many years (either organic or M&A) at very rapid rates to not be impaired. and the last many years has been a perfect (good) storm for these types of companies: 1) growing aerospace build rates and volumes, which will be somewhere above normal next few years, even using the Airbus/Boeing figures you cite, 2) cheap and available debt, 3) high willingness to pay up for "platform" companies (i.e. the outsiders book, anything bill ackman says, rear view mirror for companies of this ilk: PCP, CSU, JAH, DHR, ROP etc.) which is "reflexive" and allows further accretive acquistions, locking in employees with stock comp, etc. etc.

things can continue (and i can certainly be wrong), but i'm guessing the person who shows up late to this party, either now or sometime in the future, is likely to be disappointed.

but what do i know? group, please tell me why i am wrong...

A company that is growing fcf at 20% is seldom really expensive. You just have to figure out if they can sustain that level of growth. If they double earnings in 3 years its unlikely that the p/fcf multiple compresses, and even if it does time will improve your margin of safety. Read Phil Fisher.
Title: Re: TDG - Transdigm
Post by: Larry on October 13, 2015, 11:49:09 AM
60°North Investments, thank you for your insight, I have to dig deeper into taxation of spin offs etc.

Handycap5, it may be a bit amusing with Howley saying they dont do interviews and then they just did that. I think the point is that he is not the guy who likes to pose for front covers of business magazines, I mean they've been extremely succesful company but they are not very well known and they want to keep it that way. I actually found that article by accident, I remember a bit less than year ago I was googling up Nick Howley to find more information about him and then checked search results for articles published within last couple of weeks and this came up.

- It looks expensive yes, but I remember looking their average P/FCF ratios for years back and it seems like it has sort of always been the case. The margins are in 40%'s yes, the core doesnt grow its margins as fast anymore but the new acquisitions will continue to creep up. So I see a case for organic revenue growth if they would stop acquisitions, defence and OEM tend to be more cyclical, but I think you can count on growing aftermarket. So if you get 5% rpm growth you put some pricing on top of that you will get close to 10% if not all the way up there. Remember aftermarket is the one they make money off. You speak about perfect storm for these types of companies, but remember that Transdigm makes its money on installed base of planes. They dont make much money on OEM. So think if high aeroplane build rates collapsed, there most likely would still be planes flying around that need replacement parts.

- Debt has been cheap and they've clearly taken advantage of it. Interest rates will surely go up one day, I dont really know how to comment on that, of course it will be more expensive to refinance, they've hedged the interest rates of their debt fairly well and their maturities look good. They might just not hit the debt market as aggressively as they've done now.

- I agree there has been a lot of discussion and praising of "platform companies". I just think Transdigm has done it well. They've been going for couple of decades now and managed to grow value through acquisitions. They are strict buyers regarding on price and proprietary/aftermarket stuff. So they arent just shooting around but they are making disclipined deals with clear path to creating value through operating the companies they acquire better (getting margins up, new business development), remember that commercial aftermarket is still pretty fragmented. I remember a slide from their presentation mentioning they hold about 4% of it right now.

- So I dont see TDG as a "party that you can be late of", I just see them as a very good company with talented team running it and hopefully they will continue to be that, I see no reason why they wouldn't

- And one thing to emphasize, I dont think they "must"  keep doing acquisitions. Like I said they can stop that and continue to do grow organically, trying to move the margins up little by little and I think you would still get a nice EBITDA growth. There was some analyst asking Howley what happens when they get too big (acquisitions are too small to move a needle etc) and he just answered that they would still be able to get decent organic growth and deploy capital to dividends and share repurchases, but they want to be levered anyway so they would just pay pop dividends to lever up to their target.

So I dont know if this helps but I tried to expand my thoughts and answer some of the concerns.
Title: Re: TDG - Transdigm
Post by: handycap5 on October 13, 2015, 11:49:58 AM
very good. so why are you confident that operating earnings of $1.1B will double in the next three years and those earnings will continue to be capitalized at 20x EV/EBIT?

when prices and expectations are already high, as they are in this case, one can certainly find things workout spendidly, but one will find they are impaired if things don't. this one is too tough to call for me - certainly doesn't have the asymetry i am attracted to...

for what it is worth, in 2010, i took a chart book of largest 1000 US listed companies and looked at every non-oil company that had been able to grow earnings double-digits or greater for 10 years. it was ~5% of the companies.

and TDG was on the list, stock was $48 at the time. Berkshire Partners had just bought the stock in the open market after losing the initial PE bid to Warburg Pincus. quite a vote of confidence. if phil was still alive and in the business, he would have bought it then :)

frommi, either way, let's agree to circle back in October 2018 and see who was right (though we both can save face by arguing good decisions are distinct from good outcomes)!
Title: Re: TDG - Transdigm
Post by: Liberty on October 13, 2015, 11:58:15 AM
On thing to keep in mind about the debt: They've returned a lot of capital via special dividends (which are totally discretionary), so if they hadn't done those, they could have done the exact same number of acquisitions and reinvested the same amount in the business over the past 10 years but have a significantly lower debt load.

In other words, it's not entirely 'structural' debt that was required to build the company, but rather an opportunistic way to optimize the capital structure (Howley believes debt is mispriced, so he's taking advantage). Granted, it's not as conservative as some would like, but the cashflows are very reliable, the debt appears well structured (not my area of expertise, though), and they've proven over the years that they can delever pretty quickly if they need to.
Title: Re: TDG - Transdigm
Post by: Larry on October 13, 2015, 12:06:59 PM
The case for growth. I estimated that their EBITDA as defined would be 1485m for FY16 (0,45x3300)
Now FY17 without any acquisitions, I'll use 6,5% organic revenue growth which I think is conservative and estimate an EBITDA as defined margin of 47% for FY17 this would result to 1652m EBITDA as defined (this is without any acquisitions). During this they will make about 1500m of cash which they can for example pay down debt with so the FCF grows even faster, I dont think they will do that as they've stated they will deploy capital to acquisitions and secondly give extra back to shareholders and lastly pay off debt. So remember they've closed quite some deals this year which will be accretive. But yes, you have to have confidence that they will continue to find good deals. I think they will, but even if they dont, I dont think its going to be disaster. My own cost basis is lower than the stock price now, but I still see there is value if they will continue as succesfully as in the past.

By the way thank you for the concerns, it helps with my process too to have some doubts as well!

And yes very good point by Liberty. They've paid huge special dividends during a few years. And they've chosen to do that because they want to be levered.
Title: Re: TDG - Transdigm
Post by: Picasso on October 13, 2015, 12:39:55 PM
Platform stocks in general are expensive these days.  It wasn't that long ago when investors were paying 22x FCF for Valeant, now its at 14-15x estimated FCF.  Now add on the leverage and they trade within a wide band of valuation. 

If they stopped acquiring businesses and just paid out 100% of their taxed free cash flow in the form of dividends, what kind of returns would you expect?  Berkshire as a "platform" would be able to pay out a ton of cash.  Yet it trades at a meager valuation.  At least Transdigm pays out special dividends but when you consider the debt levels, that's probably tapped out for a while.  Right sizing the capital structure is one thing, 7x EBITDA is another.  Their bonds are CCC+ rated which is pretty damn low on the rated scale.  The bonds aren't trading at CCC+ yields but given that, I don't know how the current equity price is that great of a deal.  2.5x seems like a "win-win" area for durable businesses where right sizing the capital structure doesn't typically depress the equity valuation.  Pretty sure if you levered up Campbell Soup 7x you'd see it trade with a much lower multiple than peers. 

But the love for Outsider/platform stocks are high right now, so who knows when the market will look at this through a different lens.
Title: Re: TDG - Transdigm
Post by: Liberty on October 13, 2015, 12:58:14 PM
Their leverage oscillates a lot. I think it can be misleading to look at it near a peak and extrapolate it forward. They've been as low as 3x in 2009 and they reached their all-time highs recently, but the average since IPO is probably closer to 4-4.5x.
Title: Re: TDG - Transdigm
Post by: DeepSouth on October 13, 2015, 01:11:22 PM
Picasso,

I don't think it's fair to look at a single leverage metric as what's reasonable across industries and business models. This is a business which requires very little incremental capital (outside of M&A growth which isn't necessary to drive growth) which raises leverage levels that the business can comfortably service. At 2.5 turns, TDG (a ~noncyclical business) would be generating ~25% Fwd FCF/Debt. I think leverage metrics will tick down materially over the next 2 years FWIW.

Further, there are plenty of non cyclical consumer brands that operate with leverage similar to TDG and are well regarded in equity markets (QSR, KHC), and most of the PE industry is based on this capital structure model.

Lastly,
while the business would be richly valued if there were no further acquisitions (even though this is not probable in the near term), the business could still generate reasonable returns at a ~6% forward FCF/P yield with ~5% future organic FCF growth over the next decade. This organic growth should be reasonable: ~4.5% passenger mile growth, pricing growth, margin enhancement from optimizing last several acquisitions.
Title: Re: TDG - Transdigm
Post by: Picasso on October 13, 2015, 01:29:06 PM
I can understand the oscillations, but any company that has this much leverage typically gets a reduction in the public equity valuation.  It's probably accurate to think that the best returns in the equity come when it's underlevered (probably more to acquire, better prices on those acquisitions, less market thirst for returns) and less returns when it's highly levered.  That's sometimes flipped on its head if there's some big company issues and the debt might kill the company and so the high debt burden (if solved properly) can give very good returns.  But this is a situation where almost everyone agrees the future the bright and the sun will keep shining for decades.  So they've taken advantage of leverage to further maximize what the market is willing to capitalize (in this case a ton of capital at 6% rates). 

I don't know what the right price is for this business.  If they keep growing at high rates and the market still lets you sell out for 20x FCF with 4-5x leverage then you'll probably do really well.  I'm probably just nervous because paying 18x FCF with 7x leverage usually means something is bound to go wrong and the market will punish the story at some point.   Clearly the bond market isn't worried yet; 6% yields on CCC paper is crazy low.
Title: Re: TDG - Transdigm
Post by: Picasso on October 13, 2015, 01:36:18 PM
Well QSR and KHC are platform stocks as well, no?  They just happen to be funded with a lot of Berkshire capital otherwise they probably wouldn't have as much leverage as they do now.  The only reason KHC cost of debt is so low is because Berkshire owns equity and who wouldn't want to lend in front of Berkshire equity?

TDG and others like it are just public market versions of private equity.  It clearly works so I'm not saying the current leverage means this is a bad strategy.  But in normal market conditions the market doesn't usually give high valuations to highly levered stocks even if they have a easy time servicing the debt.  Maybe that's just a function of this low rate environment (what was TDG's cost of debt from 2009?) which makes it seem like a no brainer to lever up this way.  No one will question it until they suddenly do.

And again, I'm not bearish on this stock.  I just don't see that many ways to make enough money to compensate for the current valuation.
Title: Re: TDG - Transdigm
Post by: cmlber on October 13, 2015, 06:22:00 PM
For what it's worth, I'll add my 2 cents to this discussion.

Leverage obviously will boost TDG shareholder returns over time, but imo TDG will be a good investment even if it operated with no debt and never made another acquisition.

Forgive me if I'm slightly off on this, I've owned TDG for a while and don't really watch it closely, as I'll learn nothing from quarterly news, but last time I checked earlier in the year, it was at around a 4% unlevered free cash flow yield.

Over the last 20 years, they've done 10%/year organic growth.  They do it through a combination of RPM's increasing 5-6%/year (i.e. sell 5-6% more parts every year), price increases (2-3%/year is my guess), and cost savings (management tries to match inflation with cost savings).  The RPM portion of this organic growth engine is highly likely to persist for the next fifty years in my opinion.  As the world grows, incrementally the middle class demands more travel, and this is especially true in emerging markets.  Pricing I think will at a minimum increase with inflation.  So through volume growth and inflation based pricing increases, you get 7% organic growth every year.  4% fcf yield unlevered + 7% organic growth = 11% return every year with no leverage and no acquisitions.

Why do I think RPM's will keep growing by 5%/year?  Attached chart shows trips per capita for North America and Europe compared to India and China.  North America is 1.63 trips, Europe is 1.21, China is 0.30, India is 0.07.  There is A LOT of room to grow for those 2.6 billion people.

The natural argument is "it can't grow faster than GDP forever."  That's true, but it can grow fast for a long, long time.

I think this Buffett quote from the 1993 shareholder letter could be said today of TDG, just insert Transdigm for Coke and insert ___ million parts for ___ million cases.

“In 1938, more than 50 years after the introduction of Coke, and long after the drink was firmly established as an American icon, Fortune did an excellent story on the company. In the second paragraph the writer reported: "Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him."

Yes, competition there was in 1938 and in 1993 as well. But it's worth noting that in 1938 The Coca-Cola Co. sold 207 million cases of soft drinks (if its gallonage then is converted into the 192-ounce cases used for measurement today) and in 1993 it sold about 10.7 billion cases, a 50-fold increase in physical volume from a company that in 1938 was already dominant in its very major industry. Nor was the party over in 1938 for an investor: Though the $40 invested in 1919 in one share had (with dividends reinvested) turned into $3,277 by the end of 1938, a fresh $40 then invested in Coca-Cola stock would have grown to $25,000 by yearend 1993.” 
Title: Re: TDG - Transdigm
Post by: Picasso on October 13, 2015, 07:48:55 PM
All good points, but what happens when it or if it trades for 6% unlevered free cash?

On 2016 number, $750mm/.06 = $12.5B enterprise value.  Take out $7 billion of debt (assuming they earn the cash and paydown $1.5 billion of debt in the future) and it leaves $5.5B of equity value.  On 54 million shares, you're left with a stock worth $102 versus $220 today or more than 50% downside on a change from a 4% unlevered yield to 6%.  That's not a big shift in the whole scheme of things (and 6% is not some catastrophic unlevered yield).

If you end up with $1 billion of FCF at 6% and $7 billion of debt, you'll have an equity value of $182.  This could happen in a few years and you'll still lose money.

That's why I don't think it's as simple as assuming it will always trade at a 4% unlevered yield plus organic growth.  You can wipe out years of organic growth with a small movement in that market premium.  But clearly this is a great business, just wish it was less expensive all things considered.

And assuming you want to just value this on the equity, I find that most "platformy" stocks eventually shift from a levered view (look at free cash per share) to unlevered (look at free cash per enterprise value). 
Title: Re: TDG - Transdigm
Post by: KCLarkin on October 13, 2015, 07:55:46 PM
Given the hype, I was surprised at how low RoC is (at least based on valueline). Above average returns seem to be generated solely from copious cheap debt. Am I missing something?
Title: Re: TDG - Transdigm
Post by: frommi on October 13, 2015, 08:46:07 PM
If you end up with $1 billion of FCF at 6% and $7 billion of debt, you'll have an equity value of $182.  This could happen in a few years and you'll still lose money.


I don`t like the special dividends and the debt, too. But this is a high quality monopoly-like business with above average management and my bet is that it will fall less than the market in case of a correction. I wouldn`t bet the house on this one name, but it feels like it is much less crowded like for example VRX. But because i am concerned about a bigger market drop i hedge with low quality businesses with similar or higher valuations. (That has very well worked for me in august.)
Title: Re: TDG - Transdigm
Post by: Picasso on October 13, 2015, 10:08:48 PM
http://whalewisdom.com/filer/altarock-partners-llc

Funny to see the composition of that portfolio.  I feel like some of the posters on COBF have very similar top holdings to that fund manager.

Also, I probably have my proforma unlevered free cash wrong.  Based on Larry's estimate it's closer to a 6% free cash yield on 2017 figures.  That's also a 60% jump from 2014 figures.  It just seems like it's already accounted for a lot of the positives.  But the leverage works both ways and if it's still trading at a 4% unlevered yield then the stock is worth $350+ in less than a couple years. 
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 12:32:36 AM
Platform stocks in general are expensive these days.  It wasn't that long ago when investors were paying 22x FCF for Valeant, now its at 14-15x estimated FCF.

Picasso,
of course I agree with you: TDG is selling for a high multiple these days, no doubt about that! And, if a more serious market correction is coming, that multiple will surely compress, no doubt about this either!

But my idea with a great business that grows fast is always the same: I want to own a meaningful amount, in case no market crash comes our way and its multiple doesn’t compress; at the same time leaving a lot of room to average down, should a market crash come our way instead and consequently should its multiple compress.

This way I’ll make money, if the business keeps growing its fcf at 20% yearly and its multiple stays high (basically unchanged). At the same time, I keep the opportunity to purchase a lot more, if a rare opportunity materializes.

This is my usual strategy simply because the period of time these great compounding machines trade at a lower multiple tends to be much shorter than the period of time they trade at lofty multiples… You might end up waiting a very long time before having the opportunity of buying them, if you require a low multiple at all costs… Furthermore, even if you get the chance of buying at a low multiple, if you are not willing to hold them at a higher multiple, you’d end up selling them pretty soon, imo leaving lots of money on the table.

You might believe it or not, but I have reduced my investment in VRX because I think government intervention introduces a risk I don’t feel able to evaluate with enough conviction, and I don’t like such a risk especially because VRX uses lots of leverage… In other words, I have reduced my investment in VRX because I think government intervention renders it a less predictable business… Later, when I had time to read what I could find about the history of government intervention in the pharma industry, I mustered much more conviction and I bought back a large part of what I had sold!

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: thefatbaboon on October 14, 2015, 01:29:28 AM
Hi Gio,

I read your comment about trying to avoid government risks with some skepticism.  First, most companies have latent or explicit regulatory risk.  Second, most investors are aware that these risks exist.  Indeed an investor would have to have lived in a hole if they did not recognize regulatory risk in the following:

Aerospace
Defense
Pharmaceuticals
Healthcare
Insurance
Banking
Housing
Tobacco
Telecom
Cable
Utilities
Pipelines
Rail
Jones Act Shipping
Energy - Oil, Gas, Nuclear, Coal, Renewables

In Transdigm I would imagine the regulatory risk is that they make it easier to introduce competitive spares.  Assuming 17% cagr in Transdigm's EV, in a few years Transdigm will have an enterprise value above Precision, Rolls and everyone else in Aerospace except Boeing and Airbus.  In around 15 years Transdigm will be passing those guys!  Is it reasonable that the company that sells seat belts, faucets, plastic panelling etc is the most valuable enterprise in Aerospace simply because of a regulatory quirk that prevent competition?!  And that there are investors (Gio!) chatting here today and almost using TDG as an example of absence of regulatory risk. 

I like TDG and I think Howley is a great CEO but let's not kid ourselves that this company (and most others) doesn't face regulatory risk. I'm not a Valeant investor but I actually think I am more comfortable with regulatory risk in Valeant than I am with Transdigm where I do have an investment.  We have so much track record of regulation in Healthcare and Pharma to analyze, '90s Clinton chatter etc, a seemingly permanent divided government that can't pass anything, and Valeant sells mainly self-pay.  In contradistinction I have no idea how to handicap the risk of a day when technology permits easy and safe spare manufacture and enough big airline companies pressure the FAA to allow them.   


Regulatory risk is BY FAR the biggest fear i have with Transdigm.  They make the lowest tech, most easily knocked off stuff, and purely on account of a regulatory quirk they are on track to be the most valuable business in Aerospace within a couple of decades.  It's like the guy who makes the plastic casing for iPhones becoming bigger than Apple, Samsung and all the wireless carriers.


(Probably the only investment I have where I don't worry about significant regulatory risk is Outerwall.  Can't think of a reason the government would interest themselves in Coinstar or Redbox! Maybe Discovery Communications too. Everything else I own, and nearly everything else I have ever owned over the last 20 years, has, and has had, an important amount of regulatory risk to analyze and handicap.)
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 01:56:00 AM
I read your comment about trying to avoid government risks with some skepticism.  First, most companies have latent or explicit regulatory risk.  Second, most investors are aware that these risks exist.  Indeed an investor would have to have lived in a hole if they did not recognize regulatory risk

Well, given how the market responded to the government intervention risk, it is not clear at all to me that many investors were perfectly aware of it!
Reading all the bear arguments in the VRX thread, and believe me I have done so!, government intervention was at the bottom of the list (if in the list at all!), until it went to n.1 all of a sudden!
Of course, I also make many mistakes: I must admit that, if I had thought about the government intervention danger at all, I had dismissed it as a very low probability without giving it further thought.
Later further thought is exactly what I have given to this subject, after I was caught off guard…

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 02:04:03 AM
And that there are investors (Gio!) chatting here today and almost using TDG as an example of absence of regulatory risk. 

No, you misinterpreted what I said… I never meant to say that TDG faces no regulatory risk… where did you get that? ???

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 02:09:34 AM
Regulatory risk is BY FAR the biggest fear i have with Transdigm.  They make the lowest tech, most easily knocked off stuff, and purely on account of a regulatory quirk they are on track to be the most valuable business in Aerospace within a couple of decades.  It's like the guy who makes the plastic casing for iPhones becoming bigger than Apple, Samsung and all the wireless carriers.

Of course I think the whole industry will grow handsomely. Who will grow fastest I cannot say, but I like to invest with a great capital allocator in a great industry. We will see!

Anyway, thank you! Again I must admit I hadn’t thought about regulatory risk for TDG… Perseverare diabolicum! ;)... And surely it is better to think about it, before anyone else starts worrying!

First thought: seat belts, faucets, plastic panelling etc surely don’t attract so much public attention as drugs do.

Cheers

Gio
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 03:13:56 AM
Hi Gio,

I read your comment about trying to avoid government risks with some skepticism.

For full disclosure, with VRX I have committed another error: I have not followed what I usually do and, instead of averaging down, I averaged up… Meaning that I bought more as the stock price was going up… Not a meaningful amount, but combined with the effect of a rising stock price, it made VRX one of my largest holdings. Surely a larger percentage of my portfolio than I should have allowed given its valuation.
A mistake I have paid for! Now I hope I have learnt my lesson too! ;)

Ok, enough with a topic that doesn’t have anything to do with TDG!

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Larry on October 14, 2015, 03:57:11 AM
Just some comments.

I dont know what you count as high tech, but they dont exactly only make things like plastic parts and seat belts. You can look up their presentation but their power segment is about 50% if im not mistaken. Quote from their webpage:
Quote
TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components, systems and subsystems for use on nearly all commercial and military aircraft in service today.
I have the impression that there are pretty highly engineered stuff among their products that you need to keep the plane flying. Of course there is regulatory risk, I dont really know to comment on that.

One of Weitz's funds owns Transdigm and I remember them commenting they estimate TDG is able to rise prices 4-5%/year. Now assume RPM grows at 5% and you get some margin improvement, you're looking at low teens of organic EBITDA growth and this is what they have communicated with their presentations and this is what they have achieved during past 20 years. Of course their size becomes a matter after some time, but I think they still have a nice runway as they only hold 4% of commercial aftermarket which is growing at pace of RPM's. They're also not trying to build an empire or anything. They are willing to shrink their equity with special dividends and (so far small share repuchases). Like Liberty mentioned, when there was volatility in high yield bond markets during the financial crisis, they delevered to 3.0. During 2003-2008 their average Net Debt/EBITDA was about 4,5. So if they dont feel comfortable with the situation, they've been taking the leverage down.

After 9/11 when air traffic was stalling and their aftermarket was presumably flat to modestly down, they were still able to expand their margins. Then there was recession. Of course those kind of events can happen again, but other than that I see no reason why air traffic and therefore need for their parts shouldnt grow. This is just a case where you have to be comfortable with the way they operate regarding leverage, I think they've done well even during times when debt has been more expensive and I see no reason why that would not be the case in future. Of course they might think differently if rates go significantly up and I think they will just take the leverage lower then.
Title: Re: TDG - Transdigm
Post by: thefatbaboon on October 14, 2015, 04:46:56 AM
I exaggerated by emphasizing the basic goods they sell - they also produce actuators and electronics etc.  My point was to draw attention to the regulatory kink that exists that is responsible for a lot of TDG's competitive position.  Not all of it.  The "kink" is that a lowish cost item (like a seat belt or a panel switch) that ends up on the approved spec list for a plane model is not economic to replace with a competitive product because getting that item approved is expensive and time consuming.  This kink protects TDG from price competition.

You don't need to quote the pricing and volume stuff to me.  I know it well, and that is why I am an investor. The predictability of RPM growth together with the regulatory "kink" and a good capital allocator is very attractive and allows for the 5% price + 5%volume + 5% acquired model.  I just think it's interesting that this isn't extrapolated forward in the context of the rest of the aerospace industry.  Maybe we will be here in 20 years and Transdigm will be the big kahuna, the most basic tech part of the aerospace industry will become the most valuable part.  Or maybe at some point the regulators will allow a more cost effective way for others to compete with TDG on price. I think the margin on a lot of what TDG makes might be competed away instantly.

Personally I don't care a hoot about the debt levels.  Its the most magical thing when one can leverage a fcf stream that has predictable growth.

(One other thing, about that 4% of the commercial aftermarket thing that they trot out in their presentations...That's fine, but they should break it out because there are some big fish in that pond. Maybe they mean to imply that they're going to be building engines soon and then fulfilling aftermarket for their engines.  But if they don't intend to buy GE, Safran, United Tech or Rolls then they should probably take out a lot of that stuff from their possible market.) 
Title: Re: TDG - Transdigm
Post by: Liberty on October 14, 2015, 06:33:57 AM
Quote
In Transdigm I would imagine the regulatory risk is that they make it easier to introduce competitive spares.  Assuming 17% cagr in Transdigm's EV, in a few years Transdigm will have an enterprise value above Precision, Rolls and everyone else in Aerospace except Boeing and Airbus.  In around 15 years Transdigm will be passing those guys!  Is it reasonable that the company that sells seat belts, faucets, plastic panelling etc is the most valuable enterprise in Aerospace simply because of a regulatory quirk that prevent competition?!

Not to split hairs, but TDG can't reinvest all the cash that they generate, hence the big special dividends and sometimes the share buybacks. It's possible to imagine that the per-share value would grow at 15% for a while (including dividends) without having the absolute dollar market value of the company grow nearly as quickly. Meanwhile, if it's true that hundreds and hundreds of millions of people in Asia, South-America, and eventually Africa will become able to afford flying, the aerospace industry as a whole will become quite a bit bigger than it is now. TDG's relatively size might go up, but I don't think it has to be nearly as dramatic as you say.
Title: Re: TDG - Transdigm
Post by: Picasso on October 14, 2015, 06:51:17 AM
Isn't an acquisition just a reinvestment of generated cash?  The special dividends/leverage were more of a kind of public investor recap.  Seems like you can't have it both ways (they can't reinvest most of their cash flows vs. they will find more deals in the future) unless I'm missing something.

For example, all the special dividends could be accounted for by looking at most of the debt outstanding. 

Say what you will about the stock, but I just can't believe their debt yields 6% or less on CCC.  6%!  The historical default rate on CCC paper is like 32%.  No wonder they levered up as much as they have, I would too.
Title: Re: TDG - Transdigm
Post by: Larry on October 14, 2015, 07:04:59 AM
thefatbaboon: Just to be clear, I wasnt directing the volume + pricing stuff to you, im sure you are a good investor and familiar with this. There was some talking of pricing on one of the previous pages and people were thinking how much they are able to hike their prices and I think someone thought it would be somewhere around inflation or 2-3%, I just directed that comment made by Weitz funds to that discussion, I should have probably made it more clear there.

It will be interesting to see their guidance (which comes out next month) for FY16 and thoughts. Aftermarket has been a bit lumpy for last couple of years, a few quarters back they were flat for some time and then suddenly they were running extra heated year ago with aftermarket growing in high teens. Defence has also been picking up lately.
Title: Re: TDG - Transdigm
Post by: DeepSouth on October 14, 2015, 07:38:26 AM
Isn't an acquisition just a reinvestment of generated cash?  The special dividends/leverage were more of a kind of public investor recap.  Seems like you can't have it both ways (they can't reinvest most of their cash flows vs. they will find more deals in the future) unless I'm missing something.

For example, all the special dividends could be accounted for by looking at most of the debt outstanding. 

Say what you will about the stock, but I just can't believe their debt yields 6% or less on CCC.  6%!  The historical default rate on CCC paper is like 32%.  No wonder they levered up as much as they have, I would too.

If bondholders didn't have PTSD from getting primed for div recaps the bonds would trade even tighter. The credit market isn't stupid, this is pretty much a uniquely well positioned/advantaged business in the HY market. Rigidity in rating agency models simply disallow a levered business in a broadly cyclical industry (despite TDG's FCF's being more or less noncyclical) to be rated for its true economic risk.
Title: Re: TDG - Transdigm
Post by: cmlber on October 14, 2015, 07:44:57 AM
All good points, but what happens when it or if it trades for 6% unlevered free cash?

On 2016 number, $750mm/.06 = $12.5B enterprise value.  Take out $7 billion of debt (assuming they earn the cash and paydown $1.5 billion of debt in the future) and it leaves $5.5B of equity value.  On 54 million shares, you're left with a stock worth $102 versus $220 today or more than 50% downside on a change from a 4% unlevered yield to 6%.  That's not a big shift in the whole scheme of things (and 6% is not some catastrophic unlevered yield).

If you end up with $1 billion of FCF at 6% and $7 billion of debt, you'll have an equity value of $182.  This could happen in a few years and you'll still lose money.

That's why I don't think it's as simple as assuming it will always trade at a 4% unlevered yield plus organic growth.  You can wipe out years of organic growth with a small movement in that market premium.  But clearly this is a great business, just wish it was less expensive all things considered.

And assuming you want to just value this on the equity, I find that most "platformy" stocks eventually shift from a levered view (look at free cash per share) to unlevered (look at free cash per enterprise value).

If you're worried about a bad mark in the short term, you're right, that's a risk.  If you hold for five years and it grows by 7%/yr with no acquisitions and rerates to a 6% unlevered FCF yield, you'll still eek out a small profit.  And what are the odds that there are no acquisitions in five years? 

I plan to hold for decades.  If you hold it long enough and shut your eyes, you'll do well even if the multiple compresses significantly. 
Title: Re: TDG - Transdigm
Post by: Liberty on October 14, 2015, 07:45:32 AM
Isn't an acquisition just a reinvestment of generated cash?  The special dividends/leverage were more of a kind of public investor recap.  Seems like you can't have it both ways (they can't reinvest most of their cash flows vs. they will find more deals in the future) unless I'm missing something.

That's what I meant by reinvestment: Internal + M&A.

I think there's a balance between how much they spend on M&A + internal growth and how much they return. That's how it worked out since IPO, and the results have been fine. There are thousands of businesses they could potentially buy, many of them private and family controlled. Some they are just waiting for the owners to want to sell. If for a while they don't find enough things that are ready to be bought and that meet their criteria and they don't want to delever, they'll do a dividend or buybacks. Maybe some years the pipeline will be more active and they'll use all their capital on M&A, and maybe at some point the debt situation will be less attractive and they'll delever.  I think that flexibility is great, and I trust that they'll allocate their capital where it gets a good return.

I think the regulatory risk is real, but I see a similarity with the pharma world: The FAA, like the FDA, has a huge incentive to keep things very onerous, because the career risk is with letting through something bad rather than in blocking something good. Safety and public perception matters a lot more than price; nobody wants to see a plane crash because regulations were loosened up or because some airline tried to save a few bucks on a cheaper part (which is also why TDG focuses on parts that are relatively cheap compared to the total costs of operating a plane -- you might pick a different type of engine if one vendor offers you a deal that will save you millions, but you probably won't switch to a different valve or actuator that costs a few hundred bucks... it wouldn't even show up in the bottom line after the rounding error).
Title: Re: TDG - Transdigm
Post by: frommi on October 14, 2015, 08:17:55 AM

I think there's a balance between how much they spend on M&A + internal growth and how much they return. That's how it worked out since IPO, and the results have been fine. There are thousands of businesses they could potentially buy, many of them private and family controlled. Some they are just waiting for the owners to want to sell. If for a while they don't find enough things that are ready to be bought and that meet their criteria and they don't want to delever, they'll do a dividend or buybacks. Maybe some years the pipeline will be more active and they'll use all their capital on M&A, and maybe at some point the debt situation will be less attractive and they'll delever.  I think that flexibility is great, and I trust that they'll allocate their capital where it gets a good return.

If they had just paid back debt instead of the dividends they would have had even greater flexibility in the future. Especially for investors that have to pay taxes on the dividends that was a bad decision. (and for future investors it was bad, too.)
For the investor that was not taxed for whatever reason it is like taking on unnessary leverage. Would you take a 6% loan in the current environment to invest in the stock market?
Title: Re: TDG - Transdigm
Post by: Liberty on October 14, 2015, 08:30:00 AM

I think there's a balance between how much they spend on M&A + internal growth and how much they return. That's how it worked out since IPO, and the results have been fine. There are thousands of businesses they could potentially buy, many of them private and family controlled. Some they are just waiting for the owners to want to sell. If for a while they don't find enough things that are ready to be bought and that meet their criteria and they don't want to delever, they'll do a dividend or buybacks. Maybe some years the pipeline will be more active and they'll use all their capital on M&A, and maybe at some point the debt situation will be less attractive and they'll delever.  I think that flexibility is great, and I trust that they'll allocate their capital where it gets a good return.

If they had just paid back debt instead of the dividends they would have had even greater flexibility in the future. Especially for investors that have to pay taxes on the dividends that was a bad decision. (and for future investors it was bad, too.)
For the investor that was not taxed for whatever reason it is like taking on unnessary leverage. Would you take a 6% loan in the current environment to invest in the stock market?

The special dividends were mostly (90% for the last one, iirc) classified as "return of capital", so taxation was pretty efficient.

These guys act like public "private equity". The leverage is part of their model, and accounts for a lot of the value created in the past decades. If you're waiting for them to pay down the debt, it probably won't happen. Just like Malone wouldn't pay down the debt at his cable companies. I'm sure leverage levels will keep oscillating over time, though.
Title: Re: TDG - Transdigm
Post by: frommi on October 14, 2015, 08:42:53 AM
The special dividends were mostly (90% for the last one, iirc) classified as "return of capital", so taxation was pretty efficient.

These guys act like public "private equity". The leverage is part of their model, and accounts for a lot of the value created in the past decades. If you're waiting for them to pay down the debt, it probably won't happen. Just like Malone wouldn't pay down the debt at his cable companies. I'm sure leverage levels will keep oscillating over time, though.

I don`t, i already accepted the fact that the debt is there and the way they operate. Maybe my dislike is just that i didn`t get them because i am late in the stock, but i probably paid less for the stock because of that. So maybe i just shouldn`t bother.
Title: Re: TDG - Transdigm
Post by: thefatbaboon on October 14, 2015, 09:23:49 AM
thefatbaboon: Just to be clear, I wasnt directing the volume + pricing stuff to you, im sure you are a good investor and familiar with this. There was some talking of pricing on one of the previous pages and people were thinking how much they are able to hike their prices and I think someone thought it would be somewhere around inflation or 2-3%, I just directed that comment made by Weitz funds to that discussion, I should have probably made it more clear there.

It will be interesting to see their guidance (which comes out next month) for FY16 and thoughts. Aftermarket has been a bit lumpy for last couple of years, a few quarters back they were flat for some time and then suddenly they were running extra heated year ago with aftermarket growing in high teens. Defence has also been picking up lately.

There's also some passing commentary from Nick here and there in conf calls that support Weitz and your mid single pricing.  Most recently I think Nick was pushed on it at one point in last quarter's conf call and he pretty much as good as said that there had been no volume growth in commercial aftermarket...from which one could infer that he'd increased price mid-single.  I'm not too worried about lumpiness...at the end of the day if the planes are flying at some point the inventory movements are going to average out and spares are going to get consumed.

As is probably clear from what I've written here by far my biggest concern with TDG is to develop a better understanding of regulation and a better understanding of non-regulatory based competitive advantages.
Title: Re: TDG - Transdigm
Post by: giofranchi on October 14, 2015, 11:59:17 PM
As is probably clear from what I've written here by far my biggest concern with TDG is to develop a better understanding of regulation and a better understanding of non-regulatory based competitive advantages.

Well then, has anyone a good link to post and to share with other board members interested in TDG about the history of government intervention in the aerospace industry?

Thank you!

Gio
Title: Re: TDG - Transdigm
Post by: Schwab711 on October 25, 2015, 04:15:08 PM
http://www.firstaviation.com/uploads/2015-10-21-AeTR-PR-Aviation_Week_Sole_Source.pdf
Title: Re: TDG - Transdigm
Post by: thefatbaboon on October 26, 2015, 01:41:40 AM
http://www.firstaviation.com/uploads/2015-10-21-AeTR-PR-Aviation_Week_Sole_Source.pdf

Interesting, thanks
Title: Re: TDG - Transdigm
Post by: giofranchi on October 26, 2015, 02:18:44 AM
http://www.firstaviation.com/uploads/2015-10-21-AeTR-PR-Aviation_Week_Sole_Source.pdf

Interesting, thanks

+1

Cheers,

Gio
Title: Re: TDG - Transdigm
Post by: Schwab711 on October 26, 2015, 06:23:53 AM
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.
Title: Re: TDG - Transdigm
Post by: NewbieD on October 26, 2015, 06:33:38 AM
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/

Title: Re: TDG - Transdigm
Post by: big_triece on October 26, 2015, 10:57:57 AM
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.
Title: Re: TDG - Transdigm
Post by: rishig on October 26, 2015, 11:51:37 AM
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.
Title: Re: TDG - Transdigm
Post by: Liberty on October 26, 2015, 11:54:02 AM
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.
Title: Re: TDG - Transdigm
Post by: rishig on October 26, 2015, 12:12:22 PM
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.
Title: Re: TDG - Transdigm
Post by: Liberty on October 26, 2015, 12:15:58 PM
Thanks!
Title: Re: TDG - Transdigm
Post by: Liberty on November 19, 2015, 08:07:14 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2113950

Acquiring Breeze-Eastern Corporation for 206m. A public company this time.
Title: Re: TDG - Transdigm
Post by: giofranchi on November 19, 2015, 08:25:27 AM
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
Title: Re: TDG - Transdigm
Post by: Schwab711 on November 19, 2015, 09:05:14 AM
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.
Title: Re: TDG - Transdigm
Post by: giofranchi on November 19, 2015, 09:15:29 AM
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
Title: Re: TDG - Transdigm
Post by: Spekulatius on November 19, 2015, 05:28:49 PM
Quote
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.
Title: Re: TDG - Transdigm
Post by: giofranchi on November 20, 2015, 12:06:23 AM
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
Title: Re: TDG - Transdigm
Post by: NewbieD on December 23, 2015, 10:54:21 AM
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.
Title: Re: TDG - Transdigm
Post by: big_triece on December 23, 2015, 05:21:52 PM
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).
Title: Re: TDG - Transdigm
Post by: marazul on December 23, 2015, 05:38:33 PM
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.
Title: Re: TDG - Transdigm
Post by: Picasso on January 16, 2016, 09:58:29 PM
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.
Title: Re: TDG - Transdigm
Post by: cmlber on January 17, 2016, 08:20:59 AM
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.
Title: Re: TDG - Transdigm
Post by: Picasso on January 17, 2016, 10:14:31 AM
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.
Title: Re: TDG - Transdigm
Post by: thepupil on January 17, 2016, 11:30:25 AM
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.
Title: Re: TDG - Transdigm
Post by: cmlber on January 17, 2016, 02:19:07 PM
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.
Title: Re: TDG - Transdigm
Post by: Larry on February 09, 2016, 07:29:08 AM
Results out.

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

Quote
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.
Title: Re: TDG - Transdigm
Post by: cmlber on February 09, 2016, 08:24:00 AM
Results out.

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

Quote
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.
Title: Re: TDG - Transdigm
Post by: Larry on February 09, 2016, 09:05:49 AM
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.
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 09, 2016, 09:20:15 AM
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.
Title: Re: TDG - Transdigm
Post by: cmlber on February 09, 2016, 09:32:36 AM
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.

TDG makes substantially more on after-market.  OEM business is just done to get the after-market business.  What matters for TDG's organic growth is RPM's, which are trending as they always do.  And actually, to the extent that there are fewer new plane shipments because lower oil prices makes flying old planes economical for longer periods of time, there should be a shift of some OEM revenue to after-market revenue which is substantially higher margin.
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 09, 2016, 10:45:26 AM
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.

TDG makes substantially more on after-market.  OEM business is just done to get the after-market business.  What matters for TDG's organic growth is RPM's, which are trending as they always do.  And actually, to the extent that there are fewer new plane shipments because lower oil prices makes flying old planes economical for longer periods of time, there should be a shift of some OEM revenue to after-market revenue which is substantially higher margin.

I'm familiar with their business model. Just pointing out that they are likely losing money on the Dreamliner SKUs right now since they have OEM contracts and Dreamliner production estimates continue to be revised lower. Not only is OEM low-margin in the early years, but right now it is likely dragging earnings/margins to a greater degree than their average OEM sales.

I shouldn't have said "any growth". They could certainly could have organic growth in-spite of 787 weakness. I also agree with your assessment on the effect of oil on after-market demand. Lower oil should also help keep plane ticket prices down. I'm just trying to taper growth expectations (relative to historical organic growth) because the 787 is so important to TDG's results. 787 is still the most efficient model available (from my understanding) and trends have been improving; I think TDG will be in great shape in 5-10 years when 787 after-market sales begin.

DCO or ATRO look like potential take-out targets. If they could pull off a TGI or SPR merger that would be incredible! I'm still unsure of my view but I'm starting to think 3D printed parts is not a theat for the time being (5-10 years out).
Title: Re: TDG - Transdigm
Post by: cmlber on February 09, 2016, 11:27:19 AM
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.

TDG makes substantially more on after-market.  OEM business is just done to get the after-market business.  What matters for TDG's organic growth is RPM's, which are trending as they always do.  And actually, to the extent that there are fewer new plane shipments because lower oil prices makes flying old planes economical for longer periods of time, there should be a shift of some OEM revenue to after-market revenue which is substantially higher margin.

I'm familiar with their business model. Just pointing out that they are likely losing money on the Dreamliner SKUs right now since they have OEM contracts and Dreamliner production estimates continue to be revised lower. Not only is OEM low-margin in the early years, but right now it is likely dragging earnings/margins to a greater degree than their average OEM sales.

I shouldn't have said "any growth". They could certainly could have organic growth in-spite of 787 weakness. I also agree with your assessment on the effect of oil on after-market demand. Lower oil should also help keep plane ticket prices down. I'm just trying to taper growth expectations (relative to historical organic growth) because the 787 is so important to TDG's results. 787 is still the most efficient model available (from my understanding) and trends have been improving; I think TDG will be in great shape in 5-10 years when 787 after-market sales begin.

DCO or ATRO look like potential take-out targets. If they could pull off a TGI or SPR merger that would be incredible! I'm still unsure of my view but I'm starting to think 3D printed parts is not a theat for the time being (5-10 years out).

I understand your point, but I think looking at individual plane types is irrelevant.  RPMs are all that matter for TDG in the long run, and I don't know of any trend that is easier to predict with confidence over the next 50 years than growth in RPMs. 

Regarding 3D printing, the barrier to entry isn't the ability to produce parts at low cost.  If this was a low cost producer story, than to the extent 3D printing lowers costs per part (idk if that is even true), that would be a threat.  But I would guess that there would be hundreds of firms capable of taking any individual TDG proprietary design and manufacturing that product at costs similar to TDG today.

It's the sole source nature of the IP and the regulatory / consumer behavior hurdles that make it difficult to compete.  First you need regulatory approval, which is a lengthy process.  Then you need to convince a purchasing manager who only cares about not losing their job to swap out a reliable part that's been used for decades for a new one to save a small amount of money for the company.  If it doesn't work reliably, you lose your job.  If it does work reliably, nobody will notice the good work you did to save the company a few thousand dollars.  High risk / no reward. 

So I don't see 3D printing as a threat.  And to the extent it lowers costs to produce, those cost savings could actually end up accruing to TDG, but I'm not counting on it.
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 09, 2016, 03:06:22 PM
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.

TDG makes substantially more on after-market.  OEM business is just done to get the after-market business.  What matters for TDG's organic growth is RPM's, which are trending as they always do.  And actually, to the extent that there are fewer new plane shipments because lower oil prices makes flying old planes economical for longer periods of time, there should be a shift of some OEM revenue to after-market revenue which is substantially higher margin.

I'm familiar with their business model. Just pointing out that they are likely losing money on the Dreamliner SKUs right now since they have OEM contracts and Dreamliner production estimates continue to be revised lower. Not only is OEM low-margin in the early years, but right now it is likely dragging earnings/margins to a greater degree than their average OEM sales.

I shouldn't have said "any growth". They could certainly could have organic growth in-spite of 787 weakness. I also agree with your assessment on the effect of oil on after-market demand. Lower oil should also help keep plane ticket prices down. I'm just trying to taper growth expectations (relative to historical organic growth) because the 787 is so important to TDG's results. 787 is still the most efficient model available (from my understanding) and trends have been improving; I think TDG will be in great shape in 5-10 years when 787 after-market sales begin.

DCO or ATRO look like potential take-out targets. If they could pull off a TGI or SPR merger that would be incredible! I'm still unsure of my view but I'm starting to think 3D printed parts is not a theat for the time being (5-10 years out).

I understand your point, but I think looking at individual plane types is irrelevant.  RPMs are all that matter for TDG in the long run, and I don't know of any trend that is easier to predict with confidence over the next 50 years than growth in RPMs. 

Regarding 3D printing, the barrier to entry isn't the ability to produce parts at low cost.  If this was a low cost producer story, than to the extent 3D printing lowers costs per part (idk if that is even true), that would be a threat.  But I would guess that there would be hundreds of firms capable of taking any individual TDG proprietary design and manufacturing that product at costs similar to TDG today.

It's the sole source nature of the IP and the regulatory / consumer behavior hurdles that make it difficult to compete.  First you need regulatory approval, which is a lengthy process.  Then you need to convince a purchasing manager who only cares about not losing their job to swap out a reliable part that's been used for decades for a new one to save a small amount of money for the company.  If it doesn't work reliably, you lose your job.  If it does work reliably, nobody will notice the good work you did to save the company a few thousand dollars.  High risk / no reward. 

So I don't see 3D printing as a threat.  And to the extent it lowers costs to produce, those cost savings could actually end up accruing to TDG, but I'm not counting on it.

If RPMs are the only thing that matters then why not invest in TGI instead of TDG? TGI is certainly cheaper than TDG on a NI basis (priced at 10x to 11x TTM earnings), they've been profitable each of the last 10 years, and earnings power could be 2x to 3x TTM earnings. 80% of TGI's revenue comes from sole source contracts. Or, what about DCO or LMIA, which have a high % of revenue coming from sole-source after-market contracts? Or let's invert, why aren't these companies as profitable as TDG with the same business model? They are all protected by the same regulatory hurdles and sole-source contracts and the latter two focus on after-market parts like TDG.

For argument's sake, what if 100% of miles flown from here on out were flown in Cessna's (to avoid looking up an aircraft model that TDG doesn't supply or has a small contract with)? TDG would be bankrupt! The miles only matter so far as TDG supplies the parts for the models being flown! TDG also appears to be concentrating the models they supply in recent years, which is no different than concentrating the positions in your portfolio. Higher risk, higher reward.

Finally, I estimate TDG has invested somewhere between 5% and 15% of their current invested capital in Dreamliner production. It is a pretty substantial investment. Similarly, the discontinuation of the 747 (and soon-to-be A380) are excellent for TDG since they already earn such a small % of revenue from these models, especially considering the number of those models in existence. Presumably, airliners that previously flew 747s or A380s will fly something else in the future and TDG likely supplies a higher % of whatever new models they pick.

Which really highlights the genius of TDG (or luck?), their supply allocation. They have been on-the-nose with aircraft purchasing trends like no other in the industry. They don't have a special business model (from what I understand), they just kick-ass at executing it.

We'll save 3D parts for another day, but I think you are giving too much credit to the regulatory hurdles. It works now because the expense of the process negates any future profit. However, 3D parts should have a cost advantage which will make the regulatory process worthwhile to undergo. TDG's IP only protects them from copycat competition. It does nothing to save them from a better mouse trap (which is often forgotten in pharma investing). GE has already received approval for 3D parts in jet engines. I'm guessing it will not be as difficult to get approval for the paneling supporting an interior light fixture as it was for GE's jet engine component.
Title: Re: TDG - Transdigm
Post by: cmlber on February 09, 2016, 05:04:37 PM
If RPMs are the only thing that matters then why not invest in TGI instead of TDG? TGI is certainly cheaper than TDG on a NI basis (priced at 10x to 11x TTM earnings), they've been profitable each of the last 10 years, and earnings power could be 2x to 3x TTM earnings. 80% of TGI's revenue comes from sole source contracts. Or, what about DCO or LMIA, which have a high % of revenue coming from sole-source after-market contracts? Or let's invert, why aren't these companies as profitable as TDG with the same business model? They are all protected by the same regulatory hurdles and sole-source contracts and the latter two focus on after-market parts like TDG.

For argument's sake, what if 100% of miles flown from here on out were flown in Cessna's (to avoid looking up an aircraft model that TDG doesn't supply or has a small contract with)? TDG would be bankrupt! The miles only matter so far as TDG supplies the parts for the models being flown! TDG also appears to be concentrating the models they supply in recent years, which is no different than concentrating the positions in your portfolio. Higher risk, higher reward.

Finally, I estimate TDG has invested somewhere between 5% and 15% of their current invested capital in Dreamliner production. It is a pretty substantial investment. Similarly, the discontinuation of the 747 (and soon-to-be A380) are excellent for TDG since they already earn such a small % of revenue from these models, especially considering the number of those models in existence. Presumably, airliners that previously flew 747s or A380s will fly something else in the future and TDG likely supplies a higher % of whatever new models they pick.

Which really highlights the genius of TDG (or luck?), their supply allocation. They have been on-the-nose with aircraft purchasing trends like no other in the industry. They don't have a special business model (from what I understand), they just kick-ass at executing it.

Mine was a poorly worded statement.  We're in agreement.  What I should have said is "Given the fact that TDG has at least as much content on the mix of new planes selling today as it did in prior years (which is true), all that matters is RPMs."  And even then, as you point out, "all that matters" is an overstatement, as clearly we'd rather more of those RPMs be on planes with the highest content.  But the point I meant to make is that I don't think there will be many changes on that front that are material to the investment case.  Sure, all else equal, TDG is worth more if more Dreamliners sell as a percentage of new aircraft.  But I think you will do very well with it regardless of the specific percentage.

I don't think "sole-source" is the key.  TGI if I remember correctly is largely selling to Boeing/Airbus, who have huge bargaining power.  I also don't think "aftermarket" is in itself the key.  "sole-source aftermarket in niche, low dollar categories" is the key imo.  But I'm very open to being proven wrong.

I haven't looked at DCO or LMIA.  Do you like them more than TDG?

We'll save 3D parts for another day, but I think you are giving too much credit to the regulatory hurdles. It works now because the expense of the process negates any future profit. However, 3D parts should have a cost advantage which will make the regulatory process worthwhile to undergo. TDG's IP only protects them from copycat competition. It does nothing to save them from a better mouse trap (which is often forgotten in pharma investing). GE has already received approval for 3D parts in jet engines. I'm guessing it will not be as difficult to get approval for the paneling supporting an interior light fixture as it was for GE's jet engine component.

Let's say that 3D printing makes parts 50% cheaper than TDG's current manufacturing process.  You made a huge leap imo to assume that now "the regulatory process is worthwhile to undergo."  Why is that?  You're assuming that now the total profit in the market for that part is larger, and therefore worth going after.  But won't TDG just lower prices (given that it now has lower costs since it too will use the cheaper 3D printing technology) to the customer so that effectively the market size for the entrant is exactly the same? 

I think to believe 3D printing will disrupt TDG's business, you need to believe one of two things: 1) There are significant economies of scale in production today, and 3D printing will make the cost structure significantly more variable so that competitors can be viable without capturing large market share, or 2) Someone will have a proprietary 3D printing technology that TDG can't replicate (i.e. a better mousetrap).

I don't think 1) exists (but I could be wrong) and I think 2) is highly unlikely. 
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 09, 2016, 06:05:39 PM
Your post makes sense now and I probably could have assumed you knew the differences. I suppose the lurkers get a little more info now.

Quote
"sole-source aftermarket in niche, low dollar categories"

You might be hitting on something here to explain the difference between TDG and the other companies with high % of sole-source contracts. I've been struggling to figure out why TDG is so dominate. TDG's supply allocation seems to be perfect. Most companies have extremely high concentration to a single aircraft model. TDG's diversification is impressive.

Nothing in the industry compares to TDG from what I know of. I wish I found them a long time ago. Seriously wonderful business. TGI does some "complex assemblies" like LMIA/DCO and all the other low-return losers. BZC at least had large market-share but nothing is like TDG. I'd love to be proven wrong.

Here's my notes on LMIA/DOC:
* LMIA excellent overlap with TDG (very similar presentation - concern?)
* revenue is in decline
* focus on fuselage skins and equipment racks (looks like a computer server rack) - takes a lot of space/money to make
>>> don't see how they can expand margins with these fixed costs
>>> Low replacement rate?
>>> Is there competition with fuselage skins or are they specific to aircraft model (like car manufacturing?)
>>> everyone makes fuselage skins

I never put your low-dollar qualification together before. My notes on a few of these companies kind of hint at its importance so I think this might be the secret-sauce. Did management mention this as important part of their strategy before? I really disliked LMIA (so they'll probably do well).

DCO is 60/40 for electronics assembly (bigger % of rev then I remembered) and aerostructures.
* Pro: rotor blade and exhaust system assembly businesses; Con: fuselage skins.
>>> Waste of money, expertise, and manufacturing space for low returns.
>>> Once you enter the business, you can't leave, because of the space requirements?
* Good supply allocation, backlog, and efficiency relative to other electronic assemblers

It ended up being more of an average biz. They have a non-trivial amount of non-aerospace revenue, could be a problem for acquirer.

Similarly, I can't understand TGI's low margins. Is it purely bad management? If so, could be a multi-bagger. Where is the FCF if that's true?

You are probably right that TDG would enter 3D printing, but I fear it opens business model to competition where there currently isn't any. A lot of these suppliers already have terrible returns on capital so I worry TDG would join them.
Title: Re: TDG - Transdigm
Post by: cmlber on February 09, 2016, 07:16:58 PM
Your post makes sense now and I probably could have assumed you knew the differences. I suppose the lurkers get a little more info now.

Quote
"sole-source aftermarket in niche, low dollar categories"

You might be hitting on something here to explain the difference between TDG and the other companies with high % of sole-source contracts. I've been struggling to figure out why TDG is so dominate. TDG's supply allocation seems to be perfect. Most companies have extremely high concentration to a single aircraft model. TDG's diversification is impressive.

Nothing in the industry compares to TDG from what I know of. I wish I found them a long time ago. Seriously wonderful business. TGI does some "complex assemblies" like LMIA/DCO and all the other low-return losers. BZC at least had large market-share but nothing is like TDG. I'd love to be proven wrong.

Here's my notes on LMIA/DOC:
* LMIA excellent overlap with TDG (very similar presentation - concern?)
* revenue is in decline
* focus on fuselage skins and equipment racks (looks like a computer server rack) - takes a lot of space/money to make
>>> don't see how they can expand margins with these fixed costs
>>> Low replacement rate?
>>> Is there competition with fuselage skins or are they specific to aircraft model (like car manufacturing?)
>>> everyone makes fuselage skins

I never put your low-dollar qualification together before. My notes on a few of these companies kind of hint at its importance so I think this might be the secret-sauce. Did management mention this as important part of their strategy before? I really disliked LMIA (so they'll probably do well).

DCO is 60/40 for electronics assembly (bigger % of rev then I remembered) and aerostructures.
* Pro: rotor blade and exhaust system assembly businesses; Con: fuselage skins.
>>> Waste of money, expertise, and manufacturing space for low returns.
>>> Once you enter the business, you can't leave, because of the space requirements?
* Good supply allocation, backlog, and efficiency relative to other electronic assemblers

It ended up being more of an average biz. They have a non-trivial amount of non-aerospace revenue, could be a problem for acquirer.

Similarly, I can't understand TGI's low margins. Is it purely bad management? If so, could be a multi-bagger. Where is the FCF if that's true?

You are probably right that TDG would enter 3D printing, but I fear it opens business model to competition where there currently isn't any. A lot of these suppliers already have terrible returns on capital so I worry TDG would join them.

Thanks for the notes on LMIA/DOC.

Ya, the diversification is why I think the platforms don't really matter much.  Incrementally, which planes get more market share will move pennies, but the dollars will be in the long-run trend of more RPMs given the fact that TDG is represented in a big way on all the major planes.

And ya, I think the "low-dollar parts" piece is just as important as "aftermarket" and "sole-source".  They all work together to create massive pricing power.  Raising the price on a part from $100,000 to $150,000 is likely to get noticed, and the market for that part is likely large enough that too high of a margin will attract entry.  But raising the price on a part from $100 to $150, nobody cares.

Investor relations told me that TDG's largest parts only account for $2-3 million in revenue.  For a $2.5 billion revenue company, that's a big deal.

Imagine the economics on a single product.  If sales of the highest volume product are $3 million, that means with 45% EBITDA margins it's only $1.35 million in EBITDA in that niche market.  That's spread out between hundreds of customers.  The biggest customers might be 5% of that.  So a single decision maker switching from one part to another is deciding on a $67,500 line item, if that much.  For most of the customers the expense is a tiny fraction of even that number, and for many of the parts (since I used the largest part in this example) the market size is a fraction of that.  If you're trying to convince a purchasing manager to buy your part instead of the TDG part that's worked for decades, you have to give them some savings.  If you can save them $25,000, will that person care?  The CEO of American Airlines isn't going to congratulate you for your good work and give you a raise if you say you found a way to save $25,000.  But if the part breaks and results in delays, you may be fired.  The decision maker doesn't care if costs rise by 3%/year, all they care about is keeping their job.  Fyi, the average cost of 1 minute of delay is $81.  So if a seat belt breaks because you went with an untested cheaper alternative, and the plane can't take off, someone's not going to be happy.  And even better, TDG operates under ~40 (off the top of my head that sounds right) different company names.  So the purchasing managers don't even realize in many cases that they are buying many parts from TDG, they think they're different companies. 

So the low-dollar element I think is critical.  I remember looking at TGI for a few minutes and immediately deciding it's impossible to know what they "should" earn given that they basically sell really expensive parts to two customers.  That's a totally different dynamic.   
Title: Re: TDG - Transdigm
Post by: Larry on February 10, 2016, 01:50:41 AM
Quote
Similarly, I can't understand TGI's low margins. Is it purely bad management? If so, could be a multi-bagger. Where is the FCF if that's true?

I looked up at some of the companies you mentioned. TGI's YTD sales on Q3 2015 were: Aerostructures 64%, Aerospace Systems 28% and Aftermarket services only make 8% of sales. So it seems like they dont have much aftermarket. I dont know these companies you mentioned well but will dig deeper when I have time.
Title: Re: TDG - Transdigm
Post by: gfp on February 17, 2016, 12:51:15 PM
sec form 4's showing buying on the recent dip - (scroll down to the filings)

http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001260221
Title: Re: TDG - Transdigm
Post by: Eye4Valu on February 17, 2016, 03:07:58 PM
For those familiar with TDG, below what approximate price threshold would you consider the stock attractive? Just looking for a rough gauge of the price at which you might consider buying TDG. Thanks.
Title: Re: TDG - Transdigm
Post by: Larry on February 18, 2016, 08:00:57 AM
sec form 4's showing buying on the recent dip - (scroll down to the filings)

http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001260221

Interesting, I dont know exactly how big Berkshire Partners is, but 100m is not peanuts.
Title: Re: TDG - Transdigm
Post by: Larry on March 08, 2016, 12:22:31 PM
It looks like Robert Small bought another ~100k shares for Berkshire entities for +20m at the beginning of March and this was when the stock price had recovered significantly.
Title: Re: TDG - Transdigm
Post by: Liberty on May 10, 2016, 04:21:55 AM
Fiscal Q2 is out:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2166825

Quote
Net sales of $796.8 million, up 28.7% from $619.0 million;
EBITDA As Defined of $368.6 million, up 28.0% from $288.1 million;
Net income of $138.6 million, up 25.0% from $110.9 million;
Earnings per share of $2.47, up 26.0% from $1.96;
Adjusted earnings per share of $2.86, up 35.5% from $2.11; and
Upward revision to EBITDA As Defined and earnings per share guidance.
Title: Re: TDG - Transdigm
Post by: Larry on May 10, 2016, 04:41:39 AM
Good quarter. It seems that commercial aftermarket was up nicely (up 13%) for the quarter. They also repurchased quite a bit of shares. Helicopter and biz jet continue to shrink in OEM segment. Defense down but bookings running well a head of shipments.
Title: Re: TDG - Transdigm
Post by: Liberty on May 24, 2016, 06:23:06 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2171734

Quote
TransDigm Group Incorporated (NYSE: TDG) announced today a definitive agreement to purchase ILC Holdings, Inc., the parent company of Data Device Corporation ("DDC"), from Behrman Capital for a total purchase price of $1.0 billion in cash.  DDC is a leading supplier of databus and power supply products for the global military and commercial aerospace markets. [...] DDC revenues are anticipated to be over $200 million for the fiscal year ending December 2016 with approximately 75% coming from the defense market and the remainder primarily from the commercial transport market. Approximately 70% of revenue is derived from the aftermarket, with nearly all of the revenue from proprietary and sole source products.  Approximately 45% of revenue is derived from customers outside of the United States.
Title: Re: TDG - Transdigm
Post by: Larry on May 24, 2016, 06:45:30 AM
Wow thats a pretty sizable one. Definitely one of the largest they've done. I was thinking they might do a special dividend if the pipeline is getting light but it is surely out of question now.

They bought Telair for $725m and that had $300m in revenue (with 20% EBITDA margins). However DDC is anticipated to have revenues of "over $200m" for 2016 but they are paying $1.0 billion. They must have higher margins (but how much?) than Telair but on the otherhand DDC is 70% military, just a bit puzzled.
Title: Re: TDG - Transdigm
Post by: Schwab711 on May 24, 2016, 07:08:33 AM
https://www.glassdoor.com/Overview/Working-at-Data-Device-EI_IE300170.11,22.htm
http://listings.findthecompany.com/l/7988660/Data-Device-Corporation-in-Bohemia-NY
http://www.sandiegouniontribune.com/news/2016/apr/28/maxwell-satellite-parts-ddc-behrman/
http://www.kippsdesanto.com/2015/03/30/industry-week-in-review-march-27-2015/
http://www.aronsoncapitalpartners.com/sites/default/files/ACP%20Monthly%20MA%20Update%20-%20March%202014.pdf


It's interesting that sales were roughly $50m in the not-so-distant past. You can probably piece together DDC's recent M&A to figure out how successful the core business has been. This is basically a serial acquirer acquiring a serial acquirer. Initial reaction is this feels like an overpay. The high EV/Rev is concerning for reasons other than valuation?
Title: Re: TDG - Transdigm
Post by: Liberty on May 24, 2016, 07:10:02 AM
Wow thats a pretty sizable one. Definitely one of the largest they've done. I was thinking they might do a special dividend if the pipeline is getting light but it is surely out of question now.

They bought Telair for $725m and that had $300m in revenue (with 20% EBITDA margins). However DDC is anticipated to have revenues of "over $200m" for 2016 but they are paying $1.0 billion. They must have higher margins (but how much?) than Telair but on the otherhand DDC is 70% military, just a bit puzzled.

It'll be interesting to see how much they disclose about it during the next call. Things that are probably better than at Telair to account for the higher price: margins, growth potential, ratio of aftermarket, ratio or proprietary sole source.

Here's the info they initially gave on Telair:

Quote
Telair revenues are anticipated to be about $300 million with EBITDA margins approaching 20% for fiscal year ending May 2015. Over 80% of revenues are from the commercial aerospace market with the balance from the military aerospace market. Approximately 45% of revenues come from the aftermarket, primarily commercial transport and cargo aircraft. Approximately 95% of the revenues are from proprietary products with about 80% sold on a sole source basis.

As you can see, aftermarket is only 45% vs 70% for DDC, and sole source is 80% vs. "nearly all of the revenue from proprietary and sole source products" for DDC.
Title: Re: TDG - Transdigm
Post by: Liberty on May 24, 2016, 07:15:49 AM
https://www.glassdoor.com/Overview/Working-at-Data-Device-EI_IE300170.11,22.htm
http://listings.findthecompany.com/l/7988660/Data-Device-Corporation-in-Bohemia-NY
http://www.sandiegouniontribune.com/news/2016/apr/28/maxwell-satellite-parts-ddc-behrman/
http://www.kippsdesanto.com/2015/03/30/industry-week-in-review-march-27-2015/
http://www.aronsoncapitalpartners.com/sites/default/files/ACP%20Monthly%20MA%20Update%20-%20March%202014.pdf


It's interesting that sales were roughly $50m in the not-so-distant past. You can probably piece together DDC's recent M&A to figure out how successful the core business has been. This is basically a serial acquirer acquiring a serial acquirer. Initial reaction is this feels like an overpay. The high EV/Rev is concerning for reasons other than valuation?

Maybe the revenue estimate for this private company by that website could be off or way outdated...

If you go to their website here and register, you can download a corporate overview brochure that has a lot of interesting stuff:

http://www.ddc-web.com/about.html

There's a timeline in the brochure and it only shows one acquisition in 2013, but lots and lots of product launches. Seems like mostly an organic grower, unless they didn't include other acquisitions...

Some of their platforms here:

(http://i.imgur.com/qPUBAtp.png)
Title: Re: TDG - Transdigm
Post by: Liberty on May 24, 2016, 07:24:12 AM
Here's the timeline:

(http://i.imgur.com/tual04N.png)

(http://i.imgur.com/cKCi8eM.png)
Title: Re: TDG - Transdigm
Post by: Larry on May 24, 2016, 07:51:13 AM
Wow thats a pretty sizable one. Definitely one of the largest they've done. I was thinking they might do a special dividend if the pipeline is getting light but it is surely out of question now.

They bought Telair for $725m and that had $300m in revenue (with 20% EBITDA margins). However DDC is anticipated to have revenues of "over $200m" for 2016 but they are paying $1.0 billion. They must have higher margins (but how much?) than Telair but on the otherhand DDC is 70% military, just a bit puzzled.

It'll be interesting to see how much they disclose about it during the next call. Things that are probably better than at Telair to account for the higher price: margins, growth potential, ratio of aftermarket, ratio or proprietary sole source.

Here's the info they initially gave on Telair:

Quote
Telair revenues are anticipated to be about $300 million with EBITDA margins approaching 20% for fiscal year ending May 2015. Over 80% of revenues are from the commercial aerospace market with the balance from the military aerospace market. Approximately 45% of revenues come from the aftermarket, primarily commercial transport and cargo aircraft. Approximately 95% of the revenues are from proprietary products with about 80% sold on a sole source basis.

As you can see, aftermarket is only 45% vs 70% for DDC, and sole source is 80% vs. "nearly all of the revenue from proprietary and sole source products" for DDC.

Yea Telair's aftermarket was lighter. But I think military aftermarket has way lower margins than commercial transport aftermarket and you can use more pricing in commercial. I might remember wrong but this is what I recall. But the difference in price is still very big.

This is the first acquisition (since I have followed TDG) that got me thinking they might pay too much. I mean this business might have high margins, but I highly doubt it. Their playbook has been to atleast double the EBITDA which leads to purchase multiple halving. I dont see whats the "value case" here. But these guys are very smart in what they do so obviously there has to be something. We will have to wait couple months for the call.

Schwab thank you for the links, have to check them later! (Wrote this in hurry)
Title: Re: TDG - Transdigm
Post by: Liberty on May 25, 2016, 10:18:55 AM
http://www.transdigm.com/mobile.view?c=196053&v=203&d=1&id=2172231

950m note due 2026.
Title: Re: TDG - Transdigm
Post by: Larry on May 27, 2016, 01:23:08 PM
Quote
TransDigm to Host Analyst Day in New York City

CLEVELAND, May 27, 2016 /PRNewswire/ -- TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, announced today that it will host its 2016 Investor Conference on Thursday, June 23, 2016 in New York City. 

Faster than Liberty this time.

This will surely be interesting. I would love to hear comments on DDC acquisition, however if the deal doesn't close until analyst day, I think its unlikely that they will comment much on this.
Title: Re: TDG - Transdigm
Post by: Schwab711 on May 27, 2016, 01:30:15 PM
Quote
TransDigm to Host Analyst Day in New York City

CLEVELAND, May 27, 2016 /PRNewswire/ -- TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, announced today that it will host its 2016 Investor Conference on Thursday, June 23, 2016 in New York City. 

Faster than Liberty this time.

This will surely be interesting. I would love to hear comments on DDC acquisition, however if the deal doesn't close until analyst day, I think its unlikely that they will comment much on this.

If anyone is going to this would they be willing to share their notes? Please pm me if you are or could attend!
Title: Re: TDG - Transdigm
Post by: Liberty on May 27, 2016, 05:50:02 PM
Schwab, I think they usually stream the whole day.

Also, TDG will join the SP500 on june 2, up about 4% after hours.
Title: Re: TDG - Transdigm
Post by: Schwab711 on June 23, 2016, 06:03:13 AM
http://seekingalpha.com/pr/16528751-transdigm-completes-acquisition-data-device-corporation
Title: Re: TDG - Transdigm
Post by: Liberty on June 23, 2016, 06:10:39 AM
http://seekingalpha.com/pr/16528751-transdigm-completes-acquisition-data-device-corporation

Today is also their analyst day in NYC. They usually stream the audio, but I haven't seen a way to listen-in this time. If anyone is going and has notes to share, or if anyone finds a stream or recording, I'd appreciate it if you shared. Thanks.
Title: Re: TDG - Transdigm
Post by: Larry on June 23, 2016, 02:22:10 PM
I ran quickly through the analyst day slides.

Hopefully the webcast will be available tomorrow when I get home.
Title: Re: TDG - Transdigm
Post by: Liberty on July 05, 2016, 05:10:15 PM
I ran quickly through the analyst day slides.

Hopefully the webcast will be available tomorrow when I get home.

The webcast is now on the site.

https://content.jwplatform.com/previews/TFDXva1u-mxrau2jZ
Title: Re: TDG - Transdigm
Post by: Oreo on July 05, 2016, 05:38:08 PM
I know the bull case and I am almost certain that I will get flamed here for saying this, but i am tempted to go short here. A few put options out there that are reasonably priced; I wish they were longer-dated, though.
Preliminary rationale.

1. I am struggling to work out what is the normalized level of free cash flow (levered or unlevered) that this business would generate if it suddenly stopped doing acquisitions.

2. I also think that at some point the economic rent that TDG is extracting via its high margins will start to flow back to its customers.

3. At this point in the economic cycle, I'd rather bet against things that are net-levered 6x.

4. Some of the other actors in the value chain are struggling.

Title: Re: TDG - Transdigm
Post by: cmlber on July 05, 2016, 06:25:59 PM
I know the bull case and I am almost certain that I will get flamed here for saying this, but i am tempted to go short here. A few put options out there that are reasonably priced; I wish they were longer-dated, though.
Preliminary rationale.

1. I am struggling to work out what is the normalized level of free cash flow (levered or unlevered) that this business would generate if it suddenly stopped doing acquisitions.

2. I also think that at some point the economic rent that TDG is extracting via its high margins will start to flow back to its customers.

3. At this point in the economic cycle, I'd rather bet against things that are net-levered 6x.

4. Some of the other actors in the value chain are struggling.

Good luck with that...

Why would you short something just because you struggle to understand steady state free cash flow?  Wouldn't you short something because you don't struggle to understand steady state free cash flow and the business is expensive based on your analysis?
Title: Re: TDG - Transdigm
Post by: Oreo on July 05, 2016, 06:45:47 PM
I have learned the hard way not to short on valuation.
Title: Re: TDG - Transdigm
Post by: Larry on August 09, 2016, 10:23:02 AM
Quote
CLEVELAND, Aug. 9, 2016 /PRNewswire/ -- TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, today reported results for the third quarter ended July 2, 2016.

Highlights for the third quarter include:

    Net sales of $797.7 million, up 15.4% from $691.4 million;
    Net income of $140.6 million, up 41.9% from $99.1 million;
    Earnings per share of $2.52, up 44.0% from $1.75;
    EBITDA As Defined of $383.9 million, up 22.7% from $312.9 million;
    Adjusted earnings per share of $3.09, up 36.7% from $2.26; and
    Upward revision to fiscal 2016 financial guidance.

Net sales for the quarter rose 15.4%, or $106.3 million, to $797.7 million from $691.4 million in the comparable quarter a year ago. Organic net sales growth was 8.3%.
         

Looks good.

"EBITDA As Defined as a percentage of net sales for the quarter was 48.1%."

Very strong margins considering all the acquisitions they've done during the past 18 months or so. Stock also at ATH.
Title: Re: TDG - Transdigm
Post by: LongTermView on August 24, 2016, 09:52:56 PM
Just finished going through this thread.

http://whalewisdom.com/filer/altarock-partners-llc

Funny to see the composition of that portfolio.  I feel like some of the posters on COBF have very similar top holdings to that fund manager.

Looks like AltaRock sold around 39% of their TDG position in the quarter ending June 30th.
Title: Re: TDG - Transdigm
Post by: Liberty on September 06, 2016, 03:07:31 PM
New acquisition :

TransDigm to Acquire Young & Franklin Inc. and Tactair Fluid Controls Inc

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2199889

How early to the web did Young & Franklin have to be to get the domain YF.com ?  ???

Price is apparently $260m:

http://www.reuters.com/article/idUSFWN1BI0KM
Title: Re: TDG - Transdigm
Post by: Schwab711 on September 07, 2016, 11:05:54 AM
At 10%-15% pre-tax margins this is 24x-35x P/EBT

TDG must have fantastic pricing power
Title: Re: TDG - Transdigm
Post by: Liberty on September 07, 2016, 12:52:03 PM
At 10%-15% pre-tax margins this is 24x-35x P/EBT

TDG must have fantastic pricing power

Where do you get the 10-15% from?
Title: Re: TDG - Transdigm
Post by: Schwab711 on September 07, 2016, 12:58:25 PM
At 10%-15% pre-tax margins this is 24x-35x P/EBT

TDG must have fantastic pricing power

Where do you get the 10-15% from?

I should have clarified! It's just a guess based on higher quality manufacturing/aerospace companies of similar size I've seen (BZC had roughly those margins).

http://quotes.morningstar.com/stock/analysis-report?t=XASE:BZC&region=usa&culture=en-US&productcode=MLE&cur=
Title: Re: TDG - Transdigm
Post by: Liberty on October 04, 2016, 07:20:10 AM
http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2209032

Quote
TransDigm Group Incorporated today announced that it is seeking to increase its existing term loan facility by an additional $650 million term loan in connection with considering whether to pay a special dividend.

The Company is considering paying a cash dividend in the range of $1.1 billion to $1.5 billion with the proceeds of the proposed new term loan and cash on hand. [...]

In connection with the proposed additional term loan and related discussions with lenders, the Company is providing an update on its preliminary expectations for certain fiscal 2016 results relative to the guidance provided on August 9, 2016 in its third quarter earnings release.  Based on these preliminary expectations the August 9, 2016 guidance still appears to be materially correct.  Based on currently available information, the Company expects fiscal 2016 EBITDA As Defined to be at or modestly above the midpoint of the previously stated guidance range and net sales to be at or slightly below the low end of the guidance range.  This information is preliminary and based on estimates for the recently completed fiscal year.  The Company plans to announce actual fiscal 2016 results on November 14, 2016.
Title: Re: TDG - Transdigm
Post by: Larry on October 04, 2016, 10:21:55 AM
I guess they had a pretty good m&a pipeline but only Young & Franklin closed so now they're (most likely) paying out this dividend (~$20-$27 per share).

If my math is not totally off, this would take their net debt/EBITDA quite high, around 6.7x (?) post dividend. I quickly put together some numbers,  I just used the midpoint for dividend ($1.3B). Correct me if I'm wrong there. So they are not able to do acquisitions at least for a while after this, probably tells something about the m&a pipeline right now. So management is really keeping leverage high while debt is cheap and rates haven't risen.

Stock is up ~25% YTD, wish I didn't sell down some of my position to buy something else while it was trading at 225 earlier this year.

So quiet lately here, anyone here still owning this and what do you think about the probable special dividend?
Title: Re: TDG - Transdigm
Post by: Grenville on October 04, 2016, 10:29:26 AM
acquisition price for Young & Franklin wasn't made public

From the 8k on 9/6/16

Quote
On September 6, 2016, TransDigm Group Incorporated (NYSE: TDG) announced today that it has entered into a definitive agreement to acquire Young & Franklin Inc. (“Young & Franklin”) and its subsidiaries, including Tactair Fluid Controls Inc. (“Tactair” and collectively with Young & Franklin, the “Company”). The cash purchase price of $260 million includes approximately $73 million of tax benefits to be realized by TransDigm over a 15-year period beginning in 2016. TransDigm expects to finance the acquisition through existing cash on hand.
Title: Re: TDG - Transdigm
Post by: Larry on October 04, 2016, 10:39:17 AM
Ok thanks so it was there, they just didn't make it public in the press release.

@Liberty yes thats the press release I looked back then.
Title: Re: TDG - Transdigm
Post by: Liberty on October 04, 2016, 12:57:43 PM
Ok thanks so it was there, they just didn't make it public in the press release.

Press release here:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2199889

I posted about it here in September:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/tdg-transdigm/msg273741/#msg273741
Title: Re: TDG - Transdigm
Post by: cmlber on October 04, 2016, 01:43:44 PM
I guess they had a pretty good m&a pipeline but only Young & Franklin closed so now they're (most likely) paying out this dividend (~$20-$27 per share).

If my math is not totally off, this would take their net debt/EBITDA quite high, around 6.7x (?) post dividend. I quickly put together some numbers,  I just used the midpoint for dividend ($1.3B). Correct me if I'm wrong there. So they are not able to do acquisitions at least for a while after this, probably tells something about the m&a pipeline right now. So management is really keeping leverage high while debt is cheap and rates haven't risen.

Stock is up ~25% YTD, wish I didn't sell down some of my position to buy something else while it was trading at 225 earlier this year.

So quiet lately here, anyone here still owning this and what do you think about the probable special dividend?

Not sure if it's right that they can't do acquisitions for a while after this (depending on your definition of a while).  If EBITDA grows 10% next year and they leverage the incremental EBITDA at the same 6.7x you calculated they'd have capacity to add $1 billion in leverage a year from now and will generate $400-500 million in that time from cash flow so that's $1.5 billion to spend in a year. 
Title: Re: TDG - Transdigm
Post by: Liberty on October 04, 2016, 01:50:25 PM
They've deployed so much capital in the recent past that it wouldn't be the end of the world if they took a breather to integrate everything and delever naturally. But they're very opportunistic, so it'll all depend on what goes through the funnel...
Title: Re: TDG - Transdigm
Post by: Larry on October 04, 2016, 01:52:23 PM
You're right. I probably meant like a few months from now because I recall Nick saying they have a good m&a pipeline back in conference call or analyst day. But thats true they will delever quickly.
Title: Re: TDG - Transdigm
Post by: Liberty on October 04, 2016, 02:01:24 PM
You're right. I probably meant like a few months from now because I recall Nick saying they have a good m&a pipeline back in conference call or analyst day. But thats true they will delever quickly.

You can see their historical pattern here:

(https://pbs.twimg.com/media/Ct7nJnrVIAAsfup.png)

Note how they took leverage up after the cost of debt went way down.
Title: Re: TDG - Transdigm
Post by: Larry on October 04, 2016, 02:11:31 PM
Yea it seems to me that while we're still having low rates they intend to keep leverage at the levels we've been for the past years by paying more special dividends. There's probably an updated version of that graph in Septembers investor presentation.

What I probably meant was that if after paying the dividend they had a billion dollar opportunity (like DDC) in front of them, lets say in December, I'd guess they would have hard time getting it done.
Title: Re: TDG - Transdigm
Post by: Liberty on October 05, 2016, 05:37:31 AM
What I probably meant was that if after paying the dividend they had a billion dollar opportunity (like DDC) in front of them, lets say in December, I'd guess they would have hard time getting it done.

That could be true. Hopefully during the next call they update us on how much firepower they think they would have after a dividend.
Title: Re: TDG - Transdigm
Post by: Liberty on October 13, 2016, 09:09:30 AM
TransDigm Group Announces Tender Offer For Any and All of its 7.50% Senior Subordinated Notes due 2021

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2211602

Title: Re: TDG - Transdigm
Post by: Liberty on October 15, 2016, 06:44:12 PM
And here comes the $24 special dividend:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2211981
Title: Re: TDG - Transdigm
Post by: flesh on October 16, 2016, 11:12:38 AM
Would you help me understand why a company with so much debt would pay such a large dividend and why as a shareholder it doesn't concern you (other than getting a big divi)?

Title: Re: TDG - Transdigm
Post by: Liberty on October 16, 2016, 05:44:02 PM
Would you help me understand why a company with so much debt would pay such a large dividend and why as a shareholder it doesn't concern you (other than getting a big divi)?

For all the same reasons that TDG has done well since 1993.

I'm not trying to be glib. I mean that if you study the reasons why the company has done well, it explains why they can support a lot of debt and why they've been doing these returns of capital periodically.
Title: Re: TDG - Transdigm
Post by: Liberty on November 14, 2016, 04:55:36 AM
Fiscal Q4:

http://www.transdigm.com/mobile.view?c=196053&v=203&d=1&id=2222005

Quote
Fourth quarter net sales of $875.2 million, up 8.1% from $809.8 million;
Fourth quarter net income of $154.7 million, up 9.2% from $141.7 million;
Fourth quarter earnings per share of $2.77, up 10.8% from $2.50;
Fourth quarter EBITDA As Defined of $423.3 million, up 16.6% from $363.0 million;
Fourth quarter adjusted earnings per share of $3.29, up 16.3% from $2.83;
Fiscal 2016 net sales of $3,171.4 million, up 17.2% from $2,707.1 million;
Fiscal 2016 net income of $586.4 million, up 31.1% from $447.2 million;
Fiscal 2016 earnings per share of $10.39, up 32.5% from $7.84;
Fiscal 2016 EBITDA As Defined of $1,495.2 million, up 21.2% from $1,233.7 million; and
Fiscal 2016 adjusted earnings per share of $11.49, up 27.5% from $9.01.
Title: Re: TDG - Transdigm
Post by: Shooter MacGavin on December 15, 2016, 09:54:32 AM
just recently started kicking the tires on this name so I don't know it well.   Looking at it as a LONG.  Anyone been following the story for a while?  Do you get nervous with their acquire and fire culture?  It seems from their presentations that they make no bones about letting people go to make numbers.  I looked on glassdoor and their employees kind of confirm this.  Maybe that makes good business sense..I don't know.  The returns speak for themselves.  But aggressive cultures always make me a bit uneasy (Valeant anyone?).  Anyone  who's followed them for a while have any thoughts on their culture/their approach to acquisitions?   Thank you for your input.

 
Title: Re: TDG - Transdigm
Post by: Jurgis on December 15, 2016, 11:57:43 AM
just recently started kicking the tires on this name so I don't know it well.   Looking at it as a LONG.  Anyone been following the story for a while?  Do you get nervous with their acquire and fire culture?  It seems from their presentations that they make no bones about letting people go to make numbers.  I looked on glassdoor and their employees kind of confirm this.  Maybe that makes good business sense..I don't know.  The returns speak for themselves.  But aggressive cultures always make me a bit uneasy (Valeant anyone?).  Anyone  who's followed them for a while have any thoughts on their culture/their approach to acquisitions?   Thank you for your input.

I think you raise a valid issue. There is a risk in having levered balance sheet + possibly safety critical components + drive for numbers. If something leads to failure(s) with losses of lives, this could be in trouble.

OTOH, they might have enough of safety culture for this not to happen. I don't know. I doubt this can be easily evaluated except for backward looking "it hasn't happened yet".
Title: Re: TDG - Transdigm
Post by: Shooter MacGavin on December 15, 2016, 07:33:03 PM
that's a valid point.  I guess I was thinking more that if business unit management was constantly under pressure to make numbers, then they may behave in such a way. If not aggressive accounting (because you can catch that in the cash flow eventually) then making short term decisions at the expense of long term profitability for example.  Firing talent, and then not having resources to innovate..that kind of thing.

I guess in this case, the record is so long, so their strategy is battle tested, but it still makes me nervous.  Admittedly, I don't know enough about them yet. 
Title: Re: TDG - Transdigm
Post by: Astrea on December 16, 2016, 01:56:44 AM
I've found it a good exercise to print out all the glassdoor reviews of Valeant pre-dating Oct 2015 and its unravelling. It is my benchmark for a sewer. If you see similar patterns in other companies then I'd re-double on my due diligence. There will always be disgruntled employees, particularly in companies that run very lean operations but key is to work out whether they're just super efficient (and not everyone's "cup of tea") or whether they are cutting dangerous corners.

Some red flag quotes from the VRX reviews:

"Management is horrible"
"Toxic environment"
"What a disaster this company [...] they couldn't care less about employees and they care even less about patients"
"Vipers"
"CEO is money grubber"
"This company will soon implode"
"There is no saving this management"
"People trying to claw their way ahead stepping on others"
"Lack of accountability"
"No sense of long term or advancement in R&D"
"Very unstable"
"Hard time finding people to trust, my direct manager seems like a snake"
"Scorched earth approach to acquisitions is not sustainable"
"Nasty, nasty"
"this company and its leadership have not redeeming qualities"
"vampire company that destroys value"
"big impersonal, chaotic machine"
"Horrible culture"
"Advice to management: close your doors"
"don't believe in R&D, growth through acquisitions... for how long?"
"horrible leadership, people are warm bodies and talent is completely unimportant. Highly unethical company!!"
"company's focus on short term growth and will hurt the potential for sustainable growth"
"Utterly ruthless"
"Worst company I have ever worked for in my 12 years in the Aesthetic industry [...] they have no integrity or moral values" 
Title: Re: TDG - Transdigm
Post by: no_free_lunch on December 16, 2016, 05:57:06 AM
To be fair though, you need to look at the comments on other successful rollups.  I wonder what people at malone companies think?
Title: Re: TDG - Transdigm
Post by: Shooter MacGavin on December 16, 2016, 06:56:02 PM
I've found it a good exercise to print out all the glassdoor reviews of Valeant pre-dating Oct 2015 and its unravelling. It is my benchmark for a sewer. If you see similar patterns in other companies then I'd re-double on my due diligence. There will always be disgruntled employees, particularly in companies that run very lean operations but key is to work out whether they're just super efficient (and not everyone's "cup of tea") or whether they are cutting dangerous corners.

Some red flag quotes from the VRX reviews:

"Management is horrible"
"Toxic environment"
"What a disaster this company [...] they couldn't care less about employees and they care even less about patients"
"Vipers"
"CEO is money grubber"
"This company will soon implode"
"There is no saving this management"
"People trying to claw their way ahead stepping on others"
"Lack of accountability"
"No sense of long term or advancement in R&D"
"Very unstable"
"Hard time finding people to trust, my direct manager seems like a snake"
"Scorched earth approach to acquisitions is not sustainable"
"Nasty, nasty"
"this company and its leadership have not redeeming qualities"
"vampire company that destroys value"
"big impersonal, chaotic machine"
"Horrible culture"
"Advice to management: close your doors"
"don't believe in R&D, growth through acquisitions... for how long?"
"horrible leadership, people are warm bodies and talent is completely unimportant. Highly unethical company!!"
"company's focus on short term growth and will hurt the potential for sustainable growth"
"Utterly ruthless"
"Worst company I have ever worked for in my 12 years in the Aesthetic industry [...] they have no integrity or moral values"

Thank you so much for compiling this.  It seems like, from the few reviews I was able to discern of TDG, and the overall approval of the CEO, that Transdigm doesn't get great grades.  It's a data point with its selection biases and other flaws, but definitely worth checking out. 

To no_free_lunch, from the Malone companies I follow, I don't believe they are so aggressive with hiring and firing (talking about cable acquisitions under Global and Charter - maybe they were more aggressive during TCI days).  The biggest gains on content distribution acquisitions comes from squeezing programmers by virtue of having more subs,  and fixed capex/equipment costs spread over a larger sub base...
Title: Re: TDG - Transdigm
Post by: Astrea on December 17, 2016, 01:28:34 AM
One red flag quote from the TDG reviews:

"They only care about money not people's lives on a commercial or even civilian business plane. The greed is so self infused they don't realize they are going to kill people flying."
Title: Re: TDG - Transdigm
Post by: Shooter MacGavin on December 18, 2016, 07:15:02 AM
thank you. 

one has to obviously consider the n=1 nature of that review and as previously stated, the self-selecting nature of unhappy people posting online. Even so, there are a decent number of disgruntled employees at TDG and a glassdoor review of 1.6 stars for the CEO (only 11 reviews), which is a little bit of a red flag.  I guess I'm going to proceed with caution, keep an eye on this one as a long but maybe look elsewhere for now. I really like the business model but management and culture is a big deal in my opinion.  There are some other acquisitive companies that better ratings on glassdoor.    Thanks for the feedback.
Title: Re: TDG - Transdigm
Post by: cmlber on December 18, 2016, 10:23:12 AM
thank you. 

one has to obviously consider the n=1 nature of that review and as previously stated, the self-selecting nature of unhappy people posting online. Even so, there are a decent number of disgruntled employees at TDG and a glassdoor review of 1.6 stars for the CEO (only 11 reviews), which is a little bit of a red flag.  I guess I'm going to proceed with caution, keep an eye on this one as a long but maybe look elsewhere for now. I really like the business model but management and culture is a big deal in my opinion.  There are some other acquisitive companies that better ratings on glassdoor.    Thanks for the feedback.

TDG is very open about their business strategy.  Buy companies running with too much SG&A who don't utilize their pricing power, fire most of the employees, raise prices, rinse and repeat.  It's not surprising that the bulk of the 11 reviews on glassdoor for a company with that strategy would be negative.

Ironically, if you look at their subsidiaries on glassdoor, the reviews are average, around 3 stars.  One of them even referenced how small the company is (as a positive).  The 11 people posting on glassdoor probably found out who Nick Howley was because they got let go and were told it was because they were acquired by Transdigm so they Googled the company. 
Title: Re: TDG - Transdigm
Post by: SlowAppreciation on December 27, 2016, 11:16:49 AM
just recently started kicking the tires on this name so I don't know it well.   Looking at it as a LONG.  Anyone been following the story for a while?  Do you get nervous with their acquire and fire culture?  It seems from their presentations that they make no bones about letting people go to make numbers.  I looked on glassdoor and their employees kind of confirm this.  Maybe that makes good business sense..I don't know.  The returns speak for themselves.  But aggressive cultures always make me a bit uneasy (Valeant anyone?).  Anyone  who's followed them for a while have any thoughts on their culture/their approach to acquisitions?   Thank you for your input.

Funny you say this, as I've been doing some work on TDG the past week and I actually highlighted the "Employees" section of their 10-k as it seemed very lukewarm to me:

TDG:
Quote
....We consider our relationship with our employees generally to be satisfactory.

So I then went to Glassdoor and came across the same reviews you posted. Who knows if it means anything, but it did catch my attention. For what it's worth, here's what a few companies I've been researching say in their 10-k about their employee relations:

FAST:

Quote
None of our employees is subject to a collective bargaining agreement and we have experienced no work stoppages. We believe our employee relations are good.

TTC:

Quote
The total number of employees as of October 31, 2016 was 6,329. We consider our employee relations to be good.

JBT:

Quote
We maintain good employee relations and have successfully concluded all of our recent negotiations without a work stoppage. However, we cannot predict the outcome of future contract negotiations.

Liberty Global:
Quote
We believe that our employee relations are good.
Title: Re: TDG - Transdigm
Post by: AzCactus on December 27, 2016, 12:12:14 PM
just recently started kicking the tires on this name so I don't know it well.   Looking at it as a LONG.  Anyone been following the story for a while?  Do you get nervous with their acquire and fire culture?  It seems from their presentations that they make no bones about letting people go to make numbers.  I looked on glassdoor and their employees kind of confirm this.  Maybe that makes good business sense..I don't know.  The returns speak for themselves.  But aggressive cultures always make me a bit uneasy (Valeant anyone?).  Anyone  who's followed them for a while have any thoughts on their culture/their approach to acquisitions?   Thank you for your input.

Funny you say this, as I've been doing some work on TDG the past week and I actually highlighted the "Employees" section of their 10-k as it seemed very lukewarm to me:

TDG:
Quote
....We consider our relationship with our employees generally to be satisfactory.

So I then went to Glassdoor and came across the same reviews you posted. Who knows if it means anything, but it did catch my attention. For what it's worth, here's what a few companies I've been researching say in their 10-k about their employee relations:

FAST:

Quote
None of our employees is subject to a collective bargaining agreement and we have experienced no work stoppages. We believe our employee relations are good.

TTC:

Quote
The total number of employees as of October 31, 2016 was 6,329. We consider our employee relations to be good.

JBT:

Quote
We maintain good employee relations and have successfully concluded all of our recent negotiations without a work stoppage. However, we cannot predict the outcome of future contract negotiations.

Liberty Global:
Quote
We believe that our employee relations are good.

I really wouldn't expect a company to say something to the contrary here. 
Title: Re: TDG - Transdigm
Post by: SlowAppreciation on December 27, 2016, 12:44:51 PM
Well that's my point. TDG DID say something different from any other 10k I've read as far as I can remember.
Title: Re: TDG - Transdigm
Post by: Schwab711 on December 27, 2016, 01:38:34 PM
TDG has used the same wording since at least 2006. I searched EDGAR and at least Ford, Toyota, American Tower, and Seritage use identical wording.
Title: Re: TDG - Transdigm
Post by: cmlber on December 27, 2016, 03:33:39 PM
Well that's my point. TDG DID say something different from any other 10k I've read as far as I can remember.

Go on Thesaurus.com and type in "good," "satisfactory" is a synonym...
Title: Re: TDG - Transdigm
Post by: SlowAppreciation on December 27, 2016, 03:54:12 PM
Well that's my point. TDG DID say something different from any other 10k I've read as far as I can remember.

Go on Thesaurus.com and type in "good," "satisfactory" is a synonym...

Like I said, probably didn't mean anything but it just read more cautiously than other 10ks.

And yes, it's a synonym but they are not of the same degree. I'd rather receive a "good" grade on a test than a "satisfactory" one
Title: Re: TDG - Transdigm
Post by: Astrea on December 28, 2016, 02:11:14 PM
I agree, these are heavily lawyered documents. May seem template but there are nuances. No alarm bells though with the use of satisfactory.
Title: Re: TDG - Transdigm
Post by: LongHaul on December 29, 2016, 08:36:39 AM
great work on the 10-K employee relations catch and the Glassdoor comments.  If you are serious, check out TDG subsidiary Glassdoor reviews.

I don't like TDG at all.  The Glassdoor reviews are the tip of the iceberg in my opinion.  I think mgmt is very short term oriented and jack up prices and cut expenses for short term gains. 

2015 TDG 10-K Notes
•   No proforma sales growth in 2014, 2015 10-K, say immaterial
•   But acquisitions added 15% to sales in 2014 and 11% in 2015 so were very material, odd perhaps on purpose hiding organic revenue growth.

You know what other company had short term oriented mgmt, lots of deals, jacked up prices and horrible Glassdoor reviews where organic growth was purposely unclear?

I talked to one guy who ran the aftermarket segment of an aerospace supplier.  He said that TDG had approached him to hire him and he said no.   He didn't think their business model was sustainable.   

Think about this from the perspective of Boeing or Airbus if TDG is overcharging their customers in the aftermarket.

If I was a huge giant and there was a small leech on me I might just ignore it.  But if it got big enough I would burn it off. 
Title: Re: TDG - Transdigm
Post by: BraveChieftain on December 30, 2016, 12:32:54 PM
They give very good disclosure on organic revenue. They say what $ acquisitions contributed and what $ was organic.
Title: Re: TDG - Transdigm
Post by: hooplaer23 on January 02, 2017, 08:14:58 AM
My impression is also that TDG's price increases, while important, are much more modest than some of the 5x-20x price increases that Valeant would implement following acquisitions.  Would be interested to know if I am mistaken here. 
Title: Re: TDG - Transdigm
Post by: Liberty on January 20, 2017, 07:22:24 AM
Andrew Left has a short report on TDG:

http://www.citronresearch.com/wp-content/uploads/2017/01/TDG-final-a.pdf
Title: Re: TDG - Transdigm
Post by: thefatbaboon on January 20, 2017, 08:25:47 AM
Andrew Left has a short report on TDG:

http://www.citronresearch.com/wp-content/uploads/2017/01/TDG-final-a.pdf

Interesting. Although not sure this one is going to work so easily for the short sellers.  Transdigm seems too obscure for the mainstream media/politicians to have anything more than a passing interest.  And surely it will take more than passing media/political attention attention to really reinvent the way things get specced and spared for aircraft.  Without that being overhauled its not so easy to shift transdigm products out of the fleet or hammer prices the way the PBMs did to Valeant.

obviously just my 2 cents. 
Title: Re: TDG - Transdigm
Post by: scorpioncapital on January 21, 2017, 10:06:41 AM
I can see the stock being cut almost in half from $230/share. The risk is not insignificant. Look at IBM...If growth stalls and high debt and the market re-rates the business to only slightly above average (although some might say IBM has a moat and look at it having traded recently at 10x earnings) then at $11.84 2017 earnings x (let's be generous) 15x = $177/share. But you'd think at 15x, a company would have some growth. If pricing power unwinds, then you go in reverse, and might even go to low $100s...Not saying this will happen, but this appears to be a case of front loading growth. Even the Fed does it with interest rates so it's not entirely unheard of. But the second part of the movie, after the intermission, needs some consideration. To their credit they own above average assets with moat-like attributes. The high debt can make any changes in that dynamic highly sensitive .
Title: Re: TDG - Transdigm
Post by: thefatbaboon on January 21, 2017, 12:43:24 PM
Why do you think pricing power would unwind?  Transdigm has parts on nearly every commercial plane being built or flying around today.  Do you think Boeing, Airbus, Gulfstream etc are speccing Transdigm OEM parts because a doctor prescribes them?   If they could get better parts elsewhere for less then that's what they would be doing.

Citroen suggests there's been some dishonesty by Transdigm in the DoD bidding process - but offers zero evidence.  As for the price gouging examples, the data they give is almost completely useless as it has no specifics regarding potential differences of versions of the item priced (assuming it is even the same), or the times of the different prices.  They also have offered zero justification for the assumed "organic decline rate".  It could be tactics - and maybe they will deliver more evidence in the coming days/weeks.  But so far I can see nothing useful in this report.

As you say with a heavy debt load any revaluation of the business' EV hits the equity hard.  That's simple arithmetic and obviously true.  But I guess I don't see the equivalent of Philidor type distribution or Jublia type product.  Transdigm sells thousands of relatively low cost parts for use on thousands of planes with terms established by commercial negotiations between grown-up businesses under the auspices of FAA regulation.  There are no insurance companies, or rebates, or doctors, or simple minded patients with fungus or sexual dysfunction.  If Boeing wanted different actuators on it's 777 it would specs it.  If Ryanair wanted to buy different aftermarket seat belts they would. And if competitors thought they could make a buck selling Transdigm type products they would pay for testing and get them passed by the FAA.   
Title: Re: TDG - Transdigm
Post by: scorpioncapital on January 21, 2017, 03:23:32 PM
I agree it doesn't look like Valeant. Sometimes I think without articles like this a stock would over time meet its natural strengths and weaknesses simply by the results achieved or obstacles encountered. Notice that in this report he tries to say its worth $166 and not a zero like he claimed for Valeant. He clearly does not believe his headline hence the question mark. A slowing of price increases and debt to market cap approaching 50-50 with an interest rate between 4% and 7% could result in some turbulence ahead.
Title: Re: TDG - Transdigm
Post by: cmlber on January 21, 2017, 04:33:35 PM
I agree it doesn't look like Valeant. Sometimes I think without articles like this a stock would over time meet its natural strengths and weaknesses simply by the results achieved or obstacles encountered. Notice that in this report he tries to say its worth $166 and not a zero like he claimed for Valeant. He clearly does not believe his headline hence the question mark. A slowing of price increases and debt to market cap approaching 50-50 with an interest rate between 4% and 7% could result in some turbulence ahead.

Actually, his price target was not zero for VRX, it was $50.  He's a con artist who shorts stocks, publishes scare pieces, then closes out when they fall and he got lucky one time with VRX and now everyone pays attention to him.  His original scare piece on VRX and R&O Pharmacy turned out to be nothing.  His price targets are established by randomly picking numbers materially lower than the current price.

He made it seem like this is a defense business in that piece, when in reality it's probably 30% defense, if that much.  He also pitched this as wait until the government actually cares about prices, TDG is in for trouble, but then his own piece linked to a report where the government did try to reduce TDG prices in 2006 and nothing happened.
Title: Re: TDG - Transdigm
Post by: hooplaer23 on January 21, 2017, 05:18:12 PM
If you take a look at the full Inspector General report mentioned (http://www.dodig.mil/audit/reports/FY06/06-055.pdf), it makes many of the same points made in the Citron report.  It even talks about the use of dealers and how they are not independent of the manufacturer, which sounds like what Citron is talking about with its reference to "multiple shell distributors."  Here is an excerpt from PDF page 17 of the report:

"A sole-source manufacturer and a dealer cannot compete independently when the dealer is reliant on the sole-source manufacturer to fill the Government requirement. In the procurements reviewed, the prices quoted by the dealers were higher than the sole-source manufacturer and the delivery terms were mostly favorable to the sole-source manufacturer. As a result, the sole-source manufacturer was able to set the market price and had an inherent advantage in winning contract awards. Further, we surveyed 10 dealers about their normal processes when they quote prices for a Government requirement. The dealers consistently stated that they do not stock these parts and normally contact the sole-source manufacturer when a Government requirement becomes known. As a result, the dealers are not independent of the sole-source manufacturer."

But despite this report, as the previous post mentioned, 12 years later there does not seem to have been much of an impact on the company's defense business (of which the U.S. military is a subset).  I think the big question is whether the combination of the current political climate and Transdigm now being a bigger business makes it more likely that the government would be more effective in negotiating on price with Transdigm.  And then the follow on question is whether any scrutiny of pricing would carry over into the commercial aftermarket business, where a big portion of the company's profits are made.  In Citron's analysis, which removes the effect of price to calculate the impact on EBITDA and EPS, the assumption is that any pricing benefit is removed from the entire business, not just the defense business.  Given that the company likely does not make much margin on the commercial OEM part of the business to begin with, the pressure on pricing would have to come from the airlines, not simply Boeing and Airbus.   
Title: Re: TDG - Transdigm
Post by: Gregmal on January 21, 2017, 05:42:35 PM
What I've found is that after rather extraordinary events, everything becomes "the next (such and such)". There were plenty of "the next Enrons", plenty of well written and documented articles on "the next financial crisis", etc. VRX was rather incredible. Since the blow up, I've probably read a half dozen articles or write ups on "the next Valeant". The truth is, these rarely happen because people now look out for them. The next black swan will come from somewhere unexpected. And then there will be thirty million articles on "the next black swan".
Title: Re: TDG - Transdigm
Post by: undervalued on January 24, 2017, 12:27:12 PM
So I am reading TDG's 2016 proxy statement, on page 26 it says

Quote
Optionholders who hold vested stock options at the time a dividend is paid will receive a cash dividend equivalent
payment equal to the amount that he or she would otherwise have been entitled to receive had his or her vested stock
option been exercised immediately prior to payment of the dividend. Optionholders who hold unvested stock options may
receive a cash dividend equivalent payment equal to the amount he or she would otherwise have been entitled to receive
had his or her unvested stock option been vested and exercised immediately prior to payment of the dividend, but only if
and when such stock option vests pursuant to its terms. We believe that we have structured dividend equivalent
payments under the Company’s dividend equivalent plans such that they are not subject to any excise tax under
Section 409A of the Internal Revenue Code. Certain investors and proxy advisory firms have raised the issue as to
whether the Company should pay dividend equivalents only upon an exercise of the options; however, we believe that
tying payment of the dividend equivalents to the exercise of an option would result in excise taxes under Section 409A

Does this means options holders get paid before they actually exercise their options and they get paid special dividend just for holding the options? I guess this is one reason why management prefer special dividend rather than actual dividend. They can add loopholes around special dividend.
Title: Re: TDG - Transdigm
Post by: thefatbaboon on January 25, 2017, 07:28:33 AM
Yes they receive the dividend if the options have vested or end up vesting.

Why is this a problem for you?  It allows for a less conflicted analysis by management of share repo versus dividend.  And it doesn't force management to exercise at a time that may not be convenient or in a way and at a cost that may require a faster sale (to meet taxes on gains).

I have no problem with this. 
Title: Re: TDG - Transdigm
Post by: KCLarkin on January 25, 2017, 08:56:11 AM
How are people comfortable with the extreme leverage that Transdigm uses? Under normal business conditions, the business is pretty robust. But what happens if airlines start parking planes in the desert and cannibalizing planes for spare parts (e.g. 9/11)?
Title: Re: TDG - Transdigm
Post by: cmlber on January 25, 2017, 09:21:33 AM
How are people comfortable with the extreme leverage that Transdigm uses? Under normal business conditions, the business is pretty robust. But what happens if airlines start parking planes in the desert and cannibalizing planes for spare parts (e.g. 9/11)?

EBITDA has grown every year since 1993 including 2001, and they have no near term debt maturities.
Title: Re: TDG - Transdigm
Post by: KCLarkin on January 25, 2017, 09:42:08 AM
How are people comfortable with the extreme leverage that Transdigm uses? Under normal business conditions, the business is pretty robust. But what happens if airlines start parking planes in the desert and cannibalizing planes for spare parts (e.g. 9/11)?

EBITDA has grown every year since 1993 including 2001, and they have no near term debt maturities.

Thanks. Didn't realize they had financials available prior to the 2006 IPO.
Title: Re: TDG - Transdigm
Post by: scorpioncapital on January 25, 2017, 09:56:45 AM
"EBITDA has grown every year since 1993"

Interesting you bring up the year 1993...That's the year that a severe aerospace downturn 'turned', after several suppliers went bankrupt due to declining sales and high debt. No doubt a company that starts in the dark days of a recession like 2009 has a very low base and can show good results. Perhaps this is a really long cycle. I'm not sure it's not a cycle though.
Title: Re: TDG - Transdigm
Post by: cmlber on January 25, 2017, 11:50:05 AM
How are people comfortable with the extreme leverage that Transdigm uses? Under normal business conditions, the business is pretty robust. But what happens if airlines start parking planes in the desert and cannibalizing planes for spare parts (e.g. 9/11)?

EBITDA has grown every year since 1993 including 2001, and they have no near term debt maturities.

Thanks. Didn't realize they had financials available prior to the 2006 IPO.

They don't have full financials available, but they provide revenue and EBITDA as Defined for every year back to the founding in 1993 on each of the investor day presentations. 

Most of these parts are mandatory repairs.  The FAA has guidelines that essentially say "Once you've flown X miles, part A shall be replaced."  The options are ground the plane, or pay whatever price TDG asks. 
Title: Re: TDG - Transdigm
Post by: Jurgis on January 25, 2017, 11:56:56 AM
And I guess it's not easy to persuade FAA to accept replacement parts harvested from old planes...


With that said a large reduction of miles flown would hit TDG.
Title: Re: TDG - Transdigm
Post by: KCLarkin on January 25, 2017, 12:08:57 PM
They don't have full financials available, but they provide revenue and EBITDA as Defined for every year back to the founding in 1993 on each of the investor day presentations. 

Actually, full 10Ks seem to be available.
Title: Re: TDG - Transdigm
Post by: cmlber on January 25, 2017, 12:09:33 PM
And I guess it's not easy to persuade FAA to accept replacement parts harvested from old planes...


With that said a large reduction of miles flown would hit TDG.

There is a market for spare parts from parting out retired aircraft, but in order to do that, you need to scrap the plane.  No rational airline is going to scrap a functioning plane in a recession in order to save a few thousand dollars on parts.  So usage of surplus parts might increase slightly in a recession, but not dramatically.  And TDG would likely offset it with higher price increases and more opportunities for M&A.
Title: Re: TDG - Transdigm
Post by: Jurgis on January 25, 2017, 12:18:08 PM
Hmm, reading that, it seems that in good times airlines could be buying new planes and selling old ones to 3rd countries that may not buy TDG parts (or any parts for that matter). In bad times, the miles flown drop down, but new plane purchases also drop down, so TDG parts may be somewhat flattish (?depends I guess?).

There might be some risk that if TDG is hugely price gauging that airlines/US gov decide to bite the bullet and somehow certify other manufacturers. Not a high probability likely.

Edit: I still think that the risk of catastrophic failure with lives lost is something to consider. If this happens and TDG is shown to have skimped on QA/pushed subpar parts, this could blow it especially with the levered BS.

Disclosure: I have a very tiny position and do not plan to make it major position at this time.
Title: Re: TDG - Transdigm
Post by: KCLarkin on January 25, 2017, 12:52:17 PM
No rational airline is going to scrap a functioning plane in a recession in order to save a few thousand dollars on parts.

You wouldn't scrap an airplane just for TDG parts. But you might for the engines.

http://aviationweek.com/awin/spare-parts-pricing-and-availability-showing-volatility
Quote
How much longer will young aircraft fetch higher prices for their parts than as whole airplanes?
- Aviation Week 2012

But TDG might be insulated because the parts aren't worth the expense of recovering.
Title: Re: TDG - Transdigm
Post by: hooplaer23 on January 26, 2017, 03:17:31 PM
Citron's report highlights a few examples of parts with dramatic increases in price after Transdigm acquires a company.  But does anyone have thoughts on what this price change is on average? 

I think you can back into an estimate based on assumptions on changes in margins.  Here's an example: a company has sales of $100 and EBITDA margins of 30%, so EBITDA of $30.  TDG acquires the company and raises prices, which I assume flows straight through to EBITDA.  So if TDG raised prices by 40%, and volumes stayed the same, sales would move to $140, and EBITDA would increase to $70, or 50% EBITDA margins, which is around TDG's corporate average.  And this example is not assuming any benefit from cost improvements, which TDG talks about making following an acquisition.

It's also worth pointing out that by at least one metric, the Producer Price Index by Industry: Aerospace Product and Parts Manufacturing https://fred.stlouisfed.org/series/PCU3364133641, over the last 10 years aerospace parts have gone up in price in the range of 20%. 
Title: Re: TDG - Transdigm
Post by: fareastwarriors on February 01, 2017, 08:37:11 AM
The Short Seller Who Crushed Valeant Has Picked His Next Target

https://www.bloomberg.com/news/articles/2017-02-01/stock-s-up-1-500-ceo-s-flush-and-andrew-left-sees-a-big-bubble (https://www.bloomberg.com/news/articles/2017-02-01/stock-s-up-1-500-ceo-s-flush-and-andrew-left-sees-a-big-bubble)
Title: Re: TDG - Transdigm
Post by: Liberty on February 07, 2017, 04:43:09 AM
Q4: http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2243578

Quote
Highlights for the first quarter include:

Net sales of $814.0 million, up 16.0% from $701.7 million;
Declared and paid a special dividend and related dividend equivalent payments of $1.36 billion, or $24.00 per share;
Net income of $118.9 million, down 8.2% from $129.4 million, primarily due to refinancing expenses;
Earnings per share of $0.41, down 81.6% from $2.23, primarily due to dividend equivalent payments and refinancing expenses;
EBITDA As Defined of $385.0 million, up 20.5% from $319.4 million;
Adjusted earnings per share of $2.57, up 13.2% from $2.27; and
Upward revision to fiscal 2017 financial guidance.
Title: Re: TDG - Transdigm
Post by: Larry on February 07, 2017, 08:36:13 AM
Quote
Subsequent to the fiscal quarter end, TransDigm repurchased 666,755 shares of its common stock at an aggregate cost of approximately $150.0 million under our existing stock repurchase program.

They repurchased ~1,2% of the company in just couple of weeks, looks like after the Citron short report. Their track record in repurchasing shares during dips has been great. Listening to the call right now.
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 17, 2017, 10:29:55 AM
http://www.foxbusiness.com/politics/2017/02/17/trump-visits-boeing-sc-here-s-look-at-brand-new-dreamliner.html

Dreamliner 787-10 finally in production.
Title: Re: TDG - Transdigm
Post by: Liberty on February 22, 2017, 05:42:14 AM
$90m acquisition:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2248221
Title: Re: TDG - Transdigm
Post by: Schwab711 on February 22, 2017, 06:36:07 AM
$90m acquisition:

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=2248221

They keep adding to the Dreamliner bet. Their wiki article says sales up from €14m in 2005 to €43m in 2016 (11% CAGR). Takata acquired them for $32m in 2012.
https://de.wikipedia.org/wiki/Schroth_Safety_Products
Title: Re: TDG - Transdigm
Post by: SlowAppreciation on February 23, 2017, 03:17:31 PM
https://www.wsj.com/articles/where-are-the-toilets-order-glut-stretches-giant-jet-makers-to-limit-1487885428
Title: Re: TDG - Transdigm
Post by: Grenville on February 24, 2017, 02:17:25 PM
For whatever it's worth, Transdigm sells an additional 300mln of 6.5% 2025 notes at 101.5%.
Title: Re: TDG - Transdigm
Post by: Liberty on February 24, 2017, 07:35:58 PM
For whatever it's worth, Transdigm sells an additional 300mln of 6.5% 2025 notes at 101.5%.

They had stopped their previous offering when Andrew Left published his piece, so that's probably them getting back to it.
Title: Re: TDG - Transdigm
Post by: matthylland on March 06, 2017, 04:39:33 PM
Does anyone here go to TDG shareholder meetings? I have held the stock for a few years now and never made it. I really thought I'd make it to this years'...but it didn't happen.

Is it an event worth going? Any worthwhile notes or comments?
Title: Re: TDG - Transdigm
Post by: Liberty on March 07, 2017, 11:06:36 AM
TDG being hit again today. Here's what I found:

https://twitter.com/QTRResearch/status/839185480595963904

(https://pbs.twimg.com/media/C6VimkqUoAA1jtd.jpg:large)
Title: Re: TDG - Transdigm
Post by: hooplaer23 on March 09, 2017, 11:55:30 AM
Does anyone else have thoughts on the Citron report that came out today?  I am pretty skeptical about the section related to Bratenahl Capital.  After looking around the website, its seems like this is just the family office for Nick Howley and that they invest mostly just in other PE funds with some occasional co-investments.  The diagram points out investments in Odyssey and Berkshire, both well-respected PE firms that have been investors in TDG in the past. It wouldn't be surprising to me that Howley's family office would then make an investment in those funds.  I just don't see how that allows TDG to commit some sort of fraud, and I guess I don't see why its a big deal that Nick Howley set up the entity rather than his son who now runs it?
Title: Re: TDG - Transdigm
Post by: Grenville on March 09, 2017, 11:59:53 AM
The point that I'd like more info on is the breakdown of their EBITDA between Commercial & Defense. I haven't been able to find it yet. They breakdown revenues into Commercial OEM, Aftermarket & Defense but not EBITDA.
Title: Re: TDG - Transdigm
Post by: walkie518 on March 09, 2017, 12:22:45 PM
The Citron report appears to insinuate that there may be self-dealing.  However, the report does not uncover any new information.  It only asks for TDG to respond to its questions, regardless of merit.  If I were Howley and there was indeed no self-dealing, I wouldn't give Citron the time of day. 

As far as I can tell, clerical errors happen and Citron is grasping at straws. 
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 09, 2017, 01:19:51 PM
The Citron report appears to insinuate that there may be self-dealing.  However, the report does not uncover any new information.  It only asks for TDG to respond to its questions, regardless of merit.  If I were Howley and there was indeed no self-dealing, I wouldn't give Citron the time of day. 

As far as I can tell, clerical errors happen and Citron is grasping at straws.

Completely agree. They point out one interesting detail I didn't know but fail to mention the mechanism they used to inflate prices. Without that explanation, all they really have is a lot of different font sizes and colors.

However, there's probably pretty high odds that TDG is ripping off the USG in some form or fashion. The margins are just too high and the USG is too large of a customer for this to not be true. How  and how much are vital questions that no one seems to have the answers to (at least we know Citron doesn't). If someone figures out how and how much with respect to the USG then I'd guess TDG is going to be in serious trouble as a going-concern.

Nice job LongHaul for pointing out the EBITDA contribution question and other red flags for awhile now. I bet the answers to your early questions are going to be a big story at some point.
Title: Re: TDG - Transdigm
Post by: walkie518 on March 09, 2017, 02:11:19 PM
However, there's probably pretty high odds that TDG is ripping off the USG in some form or fashion. The margins are just too high and the USG is too large of a customer for this to not be true. How  and how much are vital questions that no one seems to have the answers to (at least we know Citron doesn't). If someone figures out how and how much with respect to the USG then I'd guess TDG is going to be in serious trouble as a going-concern.
There is always someone else on the other side of the table.  The government has the right to terminate existing contracts, reduce the value of those contracts, and audit costs associated with its TDG contracts unilaterally.   These are unfair terms.  Shouldn't TDG be paid a premium to enter a one-sided contract?  Alternatively, shouldn't the government division responsible for inking the deal be checking commercial pricing considering the circumstances? 
Title: Re: TDG - Transdigm
Post by: hooplaer23 on March 09, 2017, 02:18:30 PM
You can estimate an upper bound for U.S. government EBITDA using some of the disclosures the company made on the last call.  They stated that $210 million (7% of revenue) is sold either directly to the U.S. government or through brokers or distributors.  The company did about 1.5 billion in EBITDA as defined last year.  If you assume that the $210 million in revenue generates 100% EBITDA margins (which it obviously doesn't), that would be about 14% of total EBITDA.  The company also disclosed on the call that 18% out of its total 30% defense sales is to OEMs.  It seems unlikely to me that this business would face the same type of scrutiny as the direct U.S. government sales, but I guess it is possible. 
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 09, 2017, 05:19:19 PM
I don't really understand what you mean unilaterally. TDG voluntarily bids on direct contracts or voluntarily bids to be the subcontractor and is well aware who the end-user is at the timing of the bid. I'm not familiar with military contracts but my loose understanding is that there are guidelines covering reasonable and unreasonable profit margins. Sole source contracts seem to be given out in effort to stabilize profit margins for the contractor and simplify the supply chain for the government/military. I'm guessing there is language to deal with cases where the contract (or government) abuses these situations. I don't think the details are knowable (at least I definitely don't know them) but I think you are making assumptions of the details with your questions. No one is making TDG bid on these or buy companies that have.

I checked 4q16 call again and I didn't see any mention of % of sales to the government. Do you mind pointing me to where you see this?
The 02/2017 presentation says defense revenue is 32%, which seems more reasonable. For BZC, USG was 19% of direct sales but end-user of 74%. I believe BZC is still responsible to the USG for all or essentially all 74% of those sales, even if they aren't direct. Considering the majority of global defense spending is by the US and TDG is HQ'd in the US, I would guess the US military is the end-user of 50% to 75% of defense sales. Probably closer to 75%.

If we use $1b of sales and say 10%-12% operating margins as a 'reasonable margin' (which is what Lockheed and others earn) then we are left with ~$2.3b in commercial sales and $1.25b in operating income (54% operating margins). I'm guessing defense margins are more than 'reasonable' which is why I'm guessing they are ripping off the USG.
Title: Re: TDG - Transdigm
Post by: cmlber on March 09, 2017, 07:14:02 PM
I don't really understand what you mean unilaterally. TDG voluntarily bids on direct contracts or voluntarily bids to be the subcontractor and is well aware who the end-user is at the timing of the bid. I'm not familiar with military contracts but my loose understanding is that there are guidelines covering reasonable and unreasonable profit margins. Sole source contracts seem to be given out in effort to stabilize profit margins for the contractor and simplify the supply chain for the government/military. I'm guessing there is language to deal with cases where the contract (or government) abuses these situations. I don't think the details are knowable (at least I definitely don't know them) but I think you are making assumptions of the details with your questions. No one is making TDG bid on these or buy companies that have.

I checked 4q16 call again and I didn't see any mention of % of sales to the government. Do you mind pointing me to where you see this?
The 02/2017 presentation says defense revenue is 32%, which seems more reasonable. For BZC, USG was 19% of direct sales but end-user of 74%. I believe BZC is still responsible to the USG for all or essentially all 74% of those sales, even if they aren't direct. Considering the majority of global defense spending is by the US and TDG is HQ'd in the US, I would guess the US military is the end-user of 50% to 75% of defense sales. Probably closer to 75%.

If we use $1b of sales and say 10%-12% operating margins as a 'reasonable margin' (which is what Lockheed and others earn) then we are left with ~$2.3b in commercial sales and $1.25b in operating income (54% operating margins). I'm guessing defense margins are more than 'reasonable' which is why I'm guessing they are ripping off the USG.

In the opening remarks to the Q4 call they said only 7% of revenue is direct from the USG.  5% is direct to foreign friendly governments.  And 18% is to defense OEMs which typically have much lower margins than after market.  So it's 7% of revenue "in question" for a company with 45% margins and you think this may be the difference between going concern or not?

The first Citron scare piece noted that 10 years ago the USG was trying to reduce TDGs pricing power, and 10 years later they've accomplished what?  That's either just bureaucracy at its finest, or there's a reason they can't just lower TDGs prices at will.

Let's assume for a second that TDG is ripping off the USG.  Any speculation as to what the USG can do?  These parts have no alternative suppliers.  So besides ground aircraft in need of miantence, can they force a private company to supply parts? 
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 09, 2017, 07:29:24 PM
Moody's rates them CCC and they have 7x LT debt/EBITDA. I wasn't really making a bold call.
Title: Re: TDG - Transdigm
Post by: cmlber on March 09, 2017, 07:37:40 PM
Moody's rates them CCC and they have 7x LT debt/EBITDA. I wasn't really making a bold call.

Moody's has probably rated them CCC since the stock was $30. 
Title: Re: TDG - Transdigm
Post by: hooplaer23 on March 10, 2017, 10:09:21 AM
I'm not sure where you are seeing them rated by Moody's as CCC.  On Moody's website their LT Corporate Family has been mostly B1 with a few years recently at B2 dating back to 1999.  They were upgraded from B2 to B1 last year.  Some of the company's subordinated debt is rated CCC+ at S&P, but their issuer rating is B.
Title: Re: TDG - Transdigm
Post by: Liberty on March 10, 2017, 11:10:24 AM
Seen on Twitter:

https://embed.kumu.io/f78cefeaa3361f2d64a2a3aa7182cdff#aero-pre
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 12, 2017, 09:46:35 PM
I'm not sure where you are seeing them rated by Moody's as CCC.  On Moody's website their LT Corporate Family has been mostly B1 with a few years recently at B2 dating back to 1999.  They were upgraded from B2 to B1 last year.  Some of the company's subordinated debt is rated CCC+ at S&P, but their issuer rating is B.

You are right! Thanks for the correction. Lazy mistake.

----

As to Bratenahl, can anyone speculate on how this would affect the company's operations? It makes you wonder if margins would be greater without these extra entities?! Are they skimming or hiding money, or are they really just benign?

----

Speaking of high margins, I think the government contracts are the major risk here. It's well-known that the Pentagon has been struggling with breaking away from sole source contracts. TDG's rise almost mirrors the US's entrance into Middle East wars and the huge uptick in sole source contracts awarded by the Pentagon. More than 50% of all Pentagon contracts are sole source. I doubt anyone will make friends calling for a Pentagon spending audit but who knows.

Also, I'm pretty sure this is the report Citron referenced:
http://www.dodig.mil/audit/reports/FY06/06-055.pdf

http://aviationweek.com/awin/pentagon-ig-faults-us-navy-sole-source-supply-contracts
http://aviationweek.com/defense/pentagon-leads-us-sole-source-contracting
http://www.nextgov.com/defense/2016/08/pentagons-contract-spending-problem/131008/

To give you an idea of the confusion:
http://www.motherjones.com/politics/2015/05/b00k-arms-dudes-guy-lawson-pentagon-contracting
https://www.washingtonpost.com/investigations/pentagon-buries-evidence-of-125-billion-in-bureaucratic-waste/2016/12/05/e0668c76-9af6-11e6-a0ed-ab0774c1eaa5_story.html?utm_term=.5ec97cef85f6

In many ways, the aerospace industry appears to work a lot like the pharma industry and it seems ideal for preventing folks from looking into any bad behavior. Hundreds of billions of dollars in contracts are probably monitored on software systems older than me (not just DoD but Boeing, Lockheed, ect)
Title: Re: TDG - Transdigm
Post by: cmlber on March 13, 2017, 07:59:34 AM
As to Bratenahl, can anyone speculate on how this would affect the company's operations? It makes you wonder if margins would be greater without these extra entities?! Are they skimming or hiding money, or are they really just benign?

Nick Howley has hundreds of millions of dollars outside of TDG, is it that strange that he has a family office?

I actually laughed out loud when I saw that chart from Citron. 
Title: Re: TDG - Transdigm
Post by: Liberty on March 21, 2017, 11:06:39 AM
https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 21, 2017, 11:58:49 AM
https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business

Well that was fast! I bet whistleblower claims are going to be the next big alpha-driver for hedge funds. You get a free option on the possibility the government uses your research to collect $ and it helps your short position.
Title: Re: TDG - Transdigm
Post by: Jurgis on March 21, 2017, 12:40:09 PM
https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business

Well that was fast! I bet whistleblower claims are going to be the next big alpha-driver for hedge funds. You get a free option on the possibility the government uses your research to collect $ and it helps your short position.

Cause it worked so well for Ackman wrt HLF.  ;)
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 21, 2017, 01:34:08 PM
Let's assume for a second that TDG is ripping off the USG.  Any speculation as to what the USG can do?  These parts have no alternative suppliers.  So besides ground aircraft in need of miantence, can they force a private company to supply parts?

This is a good question and I'm not sure what the answer is. Obviously there's this call for an investigation, but I think the USG's only recourse is clawbacks of overpayment + some fine for overcharging. Maybe they could cancel some contracts and/or block them from bidding in the future but that would only be on a limited basis and not until alternative parts are available. Best I can tell, TDG doesn't rely on patents as much as they do relationships/LT contracts. Best I can tell, TDG is still entitled to 'reasonable profit' (which seems to vary between 8% and 12% - I'd guess they mean pre-tax margin?).

One of the issues I have with getting negative on TDG compared to VRX is TDG's business is legitimately great. They truly do have the best-of-breed suppliers and deserve a lot of their monopolies. I would buy them at some price. I keep going back and forth on whether TDG faces any real threat to their operations. Even if they were fined and EBITDA contracted, they could always raise more equity to continue to earn above average ROE. Current shareholders would definitely feel the pain but I don't see $0 as a realistic outcome. This is definitely in the too hard pile for me, but it's interesting to look at.

Cause it worked so well for Ackman wrt HLF.  ;)

Too soon!
Title: Re: TDG - Transdigm
Post by: Jurgis on March 21, 2017, 01:50:48 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule. Someone can do math of how much profit TDG would lose on that.

If TDG contracts went to cost+, USG would not need to cancel their contracts with TDG and look for alternative suppliers. Win win.  :P
Title: Re: TDG - Transdigm
Post by: Larry on March 21, 2017, 01:53:28 PM
Just jumping in here. I dont know why we are talking so much about their defence business, some shorts are even speculating that this would sink the company. Last time I checked commercial aftermarket still makes almost 40% of their revenue and I bet it's much higher % of their EBITDA. That segment has always been the most important reason for me to be invested in Transdigm and I haven't seen any reason this story would have changed somehow.
Title: Re: TDG - Transdigm
Post by: cmlber on March 21, 2017, 02:08:55 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 21, 2017, 02:18:27 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.
Title: Re: TDG - Transdigm
Post by: Jurgis on March 21, 2017, 02:23:43 PM
What Schwab711 said.  8)
Title: Re: TDG - Transdigm
Post by: cmlber on March 21, 2017, 02:34:07 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.

Can you link to a source on this?  I'm not aware that this is a policy.  I believe the policy is sole source contracts above a certain cost require the disclosure of cost information so that the DoD can negotiate cost+ deals effectively.  I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though. 
Title: Re: TDG - Transdigm
Post by: writser on March 21, 2017, 02:50:31 PM
Just jumping in here. I dont know why we are talking so much about their defence business, some shorts are even speculating that this would sink the company. Last time I checked commercial aftermarket still makes almost 40% of their revenue and I bet it's much higher % of their EBITDA. That segment has always been the most important reason for me to be invested in Transdigm and I haven't seen any reason this story would have changed somehow.

Well, as a counterargument, think about second-level effects. If it turns out that they are ripping off the DoD you can be sure that other customers will start monitoring their bills more closely, at the very least (and it makes it more likely they are cheating other customers too - seldom one cockroach bla bla). Philidor was only a small part of Valeant but the ensuing scrutiny brought down the entire company. Transdigm also has to pay ~500m cash to their lenders annually. A small drop in EBITDA will affect equity holders disproportionally.

Just stating the obvious here .. Not too hard to envision a bad scenario.
Title: Re: TDG - Transdigm
Post by: Jurgis on March 21, 2017, 02:52:47 PM
I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

Nobody is saying that TDG cannot refuse to do a cost+ deal. Sure they could. But would they really say "FU" to a big customer who actually might look for alternative source if they are told to "FU" and then that source could sell to other TDG customers.

I'd bet TDG won't say "FU". They will go for cost+, but will also dance to get the biggest + possible.

I believe there was info in Citron report that TDG itself suggested adjusting contract to cost+ for some contract where government got cost info.
Title: Re: TDG - Transdigm
Post by: cmlber on March 21, 2017, 03:13:09 PM
I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.
Nobody is saying that TDG cannot refuse to do a cost+ deal. Sure they could. But would they really say "FU" to a big customer who actually might look for alternative source if they are told to "FU" and then that source could sell to other TDG customers.

I'd bet TDG won't say "FU". They will go for cost+, but will also dance to get the biggest + possible.

I don't think you appreciate the pricing power of a monopoly provider of hundreds of thousands of mission-critical parts.  It's not like there are ten parts and TDG is concerned the DoD could find an alternate supplier with enough time.  There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

In 2006 the DoD made an inquiry into Transdigm's pricing and concluded:

Given the constraints of a sole-source contracting environment, Defense
Logistics Agency contracting officers were unable to effectively negotiate prices for
spare parts procured from TransDigm subsidiaries.

Another option is for DLA to reengineer or develop a Government-owned
technical data package and qualify new sources to establish a competitive market
for high dollar sole-source parts. For example, DLA and the Air Force are
attempting to address TransDigm’s unreasonable prices by funding a
reengineering project to develop a fully competitive technical data package for
the oil pump assembly housing (NSN 2990-01-259-0589). That technical data
package could be solicited to other vendors to obtain reasonable prices. However,
this process is lengthy and can be expensive.


I suspect this is how negotiations went in 2006 when this investigation happened:

DoD:  This part only costs you $20 and you've been selling it to us for $100.

TDG:  Ya, and?

DoD:  We want it for $40.

TDG:  No.

DoD:  Then we're going to find another supplier.

TDG:  Ok, good luck.

10 years later TDG has compounded at 30%+/year.
Title: Re: TDG - Transdigm
Post by: Liberty on March 21, 2017, 03:35:33 PM
The real danger is the debt. If margins were to contract severely because of action by the government, they'd still have to service a pretty large debt. If the debt is, say, 6-6.5x at current EBITDA, what is it at 30% EBITDA margins? At 20% EBITDA margins? What if the aero cycle rolls over during that time? Manufacturing these airplane parts will always be a viable business, but there could be some serious pain if they had to transition to a different model.

I'm not anything will happen, but the high debt and some unanswered questions about pricing and how much EBITDA comes from which part of the business were part of my reasons for selling a little while ago around $250. Maybe I'm being overly cautious...
Title: Re: TDG - Transdigm
Post by: Spekulatius on March 21, 2017, 04:11:03 PM
The real danger is the debt. If margins were to contract severely because of action by the government, they'd still have to service a pretty large debt. If the debt is, say, 6-6.5x at current EBITDA, what is it at 30% EBITDA margins? At 20% EBITDA margins? What if the aero cycle rolls over during that time? Manufacturing these airplane parts will always be a viable business, but there could be some serious pain if they had to transition to a different model.

I'm not anything will happen, but the high debt and some unanswered questions about pricing and how much EBITDA comes from which part of the business were part of my reasons for selling a little while ago around $250. Maybe I'm being overly cautious...

The real danger is that something is fraudulent about TDG business model, the debt will just provide to gravity to have the equity slide against zero, in the case of serious issues, just like it did with VRX.

The thing that I don't get is how they do make all these "highly proprietary" parts with only 4 % R&D. You would usually expect a huge development cost to make all these "highly proprietary" parts, but in fact the R&D cost suggest that this is not the case. How can this be?
Title: Re: TDG - Transdigm
Post by: undervalued on March 21, 2017, 04:36:32 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.

Can you link to a source on this?  I'm not aware that this is a policy.  I believe the policy is sole source contracts above a certain cost require the disclosure of cost information so that the DoD can negotiate cost+ deals effectively.  I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

I think Wayne mentioned it in his article http://seekingalpha.com/article/4054392-industry-insiders-valuation-transdigm-part-1-3 (http://seekingalpha.com/article/4054392-industry-insiders-valuation-transdigm-part-1-3)
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 21, 2017, 05:20:23 PM
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.

Can you link to a source on this?  I'm not aware that this is a policy.  I believe the policy is sole source contracts above a certain cost require the disclosure of cost information so that the DoD can negotiate cost+ deals effectively.  I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

Here's one of the manuals I was referencing:
http://www.ruffinpc.com/pdfs/dcaap7641_90.pdf

I know there is a more recent version but I haven't had time to read through the differences yet. I originally started with the earlier manual because I was interested in early M&A. For our purposes, it's probably better to use the current manual:
http://www.dcaa.mil/DCAAM_7641.90.pdf

Either way, this journal references the 'recommendation':
http://aaajournals.org/doi/pdf/10.2308/ogna-50558?code=aaan-site (p.2, 1st paragraph)

Information on "Pricing Considerations":
http://www.acq.osd.mil/dpap/dars/pgi/pgi_htm/PGI215_4.htm
>  See PGI 215.404-3(a)(vi)

FAR 15.404-4(c)(4) [referenced above]:
https://www.law.cornell.edu/cfr/text/48/15.404-4

There's also new legislation that I don't fully understand yet but I believe the above is current.
Title: Re: TDG - Transdigm
Post by: hooplaer23 on March 21, 2017, 05:48:37 PM
The debt levels at 30% EBITDA margins instead of 47% margins would obviously be very problematic for the company, but for that to happen, you have to believe there will be a significant change in the company's business model beyond its sales to the U.S. government (i.e. to other governments and more importantly to its commercial customers).  As I described in a previous post, the company indicated that approximately $210 million of its sales were to the U.S. government (both direct and through distributors).  In 2016 the company had 3.2 billion in revenue and $1.5 billion in EBITDA as defined.  Even if the U.S. government sales were 100% EBITDA margin (which seems implausible), and that entire $210 million in EBITDA went away, the company would still be earning $3 billion in revenue and $1.3 billion in EBITDA, or 43% margins. 

You could argue that sales to domestic defense OEMs like Boeing and Lockheed, which account for 12% of revenue ($380 million) could also face margin pressure, but these sales likely had lower EBITDA margins to be begin with.  Using the same scenario where these revenues are 100% EBITDA margin (again they aren't in reality), if you cut revenue and EBITDA by another $400 million you would get $2.6 billion in revenue and $0.9 billion in EBITDA, or about 35% EBITDA margins. 

 I am not saying that it is impossible that this scrutiny could flow over into its commercial aftermarket business, although I believe that is unlikely.  But my point is to highlight the draconian assumptions you have to make on the defense side to even get to 35% EBITDA margins if you assume no change to the commercial business.   
Title: Re: TDG - Transdigm
Post by: cmlber on March 21, 2017, 07:26:28 PM
Here's one of the manuals I was referencing:
http://www.ruffinpc.com/pdfs/dcaap7641_90.pdf

I know there is a more recent version but I haven't had time to read through the differences yet. I originally started with the earlier manual because I was interested in early M&A. For our purposes, it's probably better to use the current manual:
http://www.dcaa.mil/DCAAM_7641.90.pdf

Either way, this journal references the 'recommendation':
http://aaajournals.org/doi/pdf/10.2308/ogna-50558?code=aaan-site (p.2, 1st paragraph)

Information on "Pricing Considerations":
http://www.acq.osd.mil/dpap/dars/pgi/pgi_htm/PGI215_4.htm
>  See PGI 215.404-3(a)(vi)

FAR 15.404-4(c)(4) [referenced above]:
https://www.law.cornell.edu/cfr/text/48/15.404-4

There's also new legislation that I don't fully understand yet but I believe the above is current.

Those links discuss the thresholds where a company is required to disclose cost data.  There is no requirement that TDG supply the government with products under cost+ contracts.  There is only a requirement to share cost information, under the theory that this will make it easier to negotiate, for products with sales above a certain threshold. 
Title: Re: TDG - Transdigm
Post by: thefatbaboon on March 22, 2017, 01:45:48 AM
My mind keeps going back to the slide from the last investor day (page 21). 

90% of total commercial aftermarket revenues are made from the sale of parts that sell less than $2m per year.  Across all the various major airlines like BA or AA that ends up being maximum $135,000 per year per part per airline.

Title: Re: TDG - Transdigm
Post by: HopeIsNotAStrategy on March 22, 2017, 10:06:43 AM

There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Been following HEI for awhile, newer on TDG. Thanks everyone for all of the very helpful info in this thread. Agree cmlber with your 2/9/2016 comment that the combination of "sole-source aftermarket in niche, low dollar categories" is crucial and a durable moat, but just a note on the barrier to PMA knockoffs. HEI has said that they can only do 300-500 new PMA parts per year not because they could not get more parts through the approval process, but because they cannot sell the new parts; they are maxing out on what airlines are willing to incrementally adopt from a new supplier. Customer adoption is the barrier, not the number of parts TDG has vs HEI's ability to penetrate them.
Title: Re: TDG - Transdigm
Post by: cmlber on March 22, 2017, 10:57:27 AM

There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Been following HEI for awhile, newer on TDG. Thanks everyone for all of the very helpful info in this thread. Agree cmlber with your 2/9/2016 comment that the combination of "sole-source aftermarket in niche, low dollar categories" is crucial and a durable moat, but just a note on the barrier to PMA knockoffs. HEI has said that they can only do 300-500 new PMA parts per year not because they could not get more parts through the approval process, but because they cannot sell the new parts; they are maxing out on what airlines are willing to incrementally adopt from a new supplier. Customer adoption is the barrier, not the number of parts TDG has vs HEI's ability to penetrate them.

That's correct, they say they can probably double capacity if the airlines were more accepting.  The point remains though, that even if they could do 2,000 parts/year, TDG has hundreds of thousands of parts.  It would take many years to PMA all of their parts. 
Title: Re: TDG - Transdigm
Post by: Spekulatius on March 22, 2017, 12:26:43 PM
The  Hurdle to replace a part with a part from a different supplier, or even the same supplier made differently is quite high in Aerospace. some parts required requalifcations, engineering reviews etc. when engineers would even think twice if it were a consumer product.

 Think one of the risk that had not been discussed much that TDG is facing is if an customer find substantial deficiencies in TDG quality system. It may not even be an actual defect part, even though those often abuse those deficiencies come to light. From a quality system POV, aerospace is quite unforgiving and the norm for AS9100 (aerospace quality manual) is much tougher and specific than the standard ISO norms.
For example  aerospace typically requires full tracablilty of all the produced parts/lots as well as raw materials. If something were found significantly deficient, because TDG cuts corners, it would potentially be very expensive to cure and in this case, I think the airlines willingness to look for alternative suppliers would go way up.

I think with all the acquisitions that TDG is performing and the associated cost cutting, this risk is way higher than it would be with a company that has a lower growth rate or growth organically.

I don't work in Aerospace, but I have worked with a company that supplier parts for aerospace customers as well, so I am sort of familiar with the quality system as they compare with standard industrial products for example.
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 22, 2017, 03:51:37 PM
There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Do you know how many parts represent 10%, 25%, and 50% of total revenue? I'm thinking Heico probably wouldn't need to get a PMA for a large number of parts to compete against a high % of TDG's revenue.

I know any comparison to VRX has a ton of implications and I am not trying to imply anything like that with TDG. However, VRX had 1000s of drugs (and also said that no specific drug was a material portion of their revenue) but the top-30 drugs represented roughly 50% of total revenue. They were a lot more concentrated than most people expected once they went from reporting top-10 to top-30. Given TDG's business, I think it would be useful to know the revenue of their top-25 parts and/or how many parts represent 10%, 25%, and 50% of revenue. I imagine Heico would focus on the highest grossing parts and has no interest in getting a PMA for a part that has $10k/yr in sales.
Title: Re: TDG - Transdigm
Post by: cmlber on March 22, 2017, 04:26:21 PM
There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Do you know how many parts represent 10%, 25%, and 50% of total revenue? I'm thinking Heico probably wouldn't need to get a PMA for a large number of parts to compete against a high % of TDG's revenue.

I know any comparison to VRX has a ton of implications and I am not trying to imply anything like that with TDG. However, VRX had 1000s of drugs (and also said that no specific drug was a material portion of their revenue) but the top-30 drugs represented roughly 50% of total revenue. They were a lot more concentrated than most people expected once they went from reporting top-10 to top-30. Given TDG's business, I think it would be useful to know the revenue of their top-25 parts and/or how many parts represent 10%, 25%, and 50% of revenue. I imagine Heico would focus on the highest grossing parts and has no interest in getting a PMA for a part that has $10k/yr in sales.

TDG discloses that 90% of their revenue comes from parts with $2mm of revenue or less, that's on a $3.5bn revenue base.  PMAs are 2-3% of the market, and Heico says TDG parts are probably less penetrated then average because they aren't high enough volume to target.  They specifically say they tend to avoid TDG parts.  A $1-2mm part is worthy of being PMA'd, so it's safe to say the 90% of revenue is not 1500-3000 $1-2mm parts.  Many parts are also highly proprietary and can't be reverse engineered.   
Title: Re: TDG - Transdigm
Post by: Spekulatius on March 22, 2017, 05:39:17 PM
Quote
.  Many parts are also highly proprietary and can't be reverse engineered

That  does not rhyme with the fact that their R&D spending is 4% of revenues. Based  in what they are stating and diversity of the product line, I would expect their R@D content to be much higher. Either it is simply not true whet they are stating or they are just harvesting profits from the companies they acquiring from existing products, which would be similar to VRX business model.

Decent article in gurufocus:
http://www.gurufocus.com/news/493786/transdigm-looks-cheap--but-no-thanks (http://www.gurufocus.com/news/493786/transdigm-looks-cheap--but-no-thanks)
Title: Re: TDG - Transdigm
Post by: thefatbaboon on March 23, 2017, 01:34:19 AM
Quote
.  Many parts are also highly proprietary and can't be reverse engineered

That  does not rhyme with the fact that their R&D spending is 4% of revenues. Based  in what they are stating and diversity of the product line, I would expect their R@D content to be much higher. Either it is simply not true whet they are stating or they are just harvesting profits from the companies they acquiring from existing products, which would be similar to VRX business model.

Decent article in gurufocus:
http://www.gurufocus.com/news/493786/transdigm-looks-cheap--but-no-thanks (http://www.gurufocus.com/news/493786/transdigm-looks-cheap--but-no-thanks)

Spekulatius, I don't how much one can infer from the apparently low % of total revenues spent on R&D.  If one assumes this business is very bifurcated between (1) First decade of design, test, initial oem production, initial spare stocking on the one hand and (2.) Subsequent decades of very high margin, zero R&D, zero compliance, staff reduction, production refinements, oem tail off,  starting spare volume decline (negative LSD to negative MSD depending), and above inflation pricing. 

Bucket 1 is likely a very R&D intensive, low margin, engineered business and it probably extends over quite a few years.  It takes a large portfolio of old,  tail products (likely in volume decline) to get an average EBITDA margin like TDG but for anyone looking to compete in the first decade they have got to stand up a highly engineered, regulated, low margin business that designs and sells really low ticket-price items and wait and see what might happen to margins in subsequent decades. It is very likely if you split off the first decade and prepared a Revenue Statement of all TDG's 1st decade businesses it would look totally different to overall TDG.
Title: Re: TDG - Transdigm
Post by: Spekulatius on March 23, 2017, 04:15:10 AM
^ The above explanation for the low R&D implies that TDG is just harvesting existing products from the companies they rolled up and not replacing them, in agggregate.
As we speak, the engineers at Boeing, Airbus, Lockheed etc. are designing the next generation Aircraft and TDG's engineers should be designing parts for those, unless they don't care about the business in. 10 years. That's the VRX model again. It's either that, or TDG's products are really build to print from their customers, which imo, creates a lower hurdle to replace TDG as a supplier long term.

I also ask myself what engineer would want to work for a company with such abysmal Glassdoor reviews. Admittedly, the Glassdoor reviews may be biased, due to TDG merger activities, but still - this is one of the lowest ratings I have ever seen. I probably would pass on a job offer from such a company. You will be the judge whether that matters or not for an TDG's investment thesis.

For me, the red flags with this one are quite obvious and very evident. I think this will be another case where the Rollup story ends up in tears.
Title: Re: TDG - Transdigm
Post by: cmlber on March 23, 2017, 04:52:31 AM
As we speak, the engineers at Boeing, Airbus, Lockheed etc. are designing the next generation Aircraft and TDG's engineers should be designing parts for those, unless they don't care about the business in. 10 years. That's the VRX model again. It's either that, or TDG's products are really build to print from their customers, which imo, creates a lower hurdle to replace TDG as a supplier long term.

TDG discloses that they have more content on the next generation of the major platforms than they had on the previous generations.

This is a direct quote from a former Airbus buyer, "I don’t want to find out later that because you didn’t have enough resources to actually perform my whole production line is stopped. You get crucified if you hold up the production line. Huge reluctance to switch, that’s why they like to roll the contracts over. If you find out the new guy cant do the job, then the head of programs says how come I’ve got a latch problem we’ve been doing this for 20 years and never had a latch problem, what idiot did this?"

The buyers at Airbus and Boeing are very hesitant to switch.  Their incentives are to try to get a little bit of savings each contract and just roll it over with the same supplier, even if there are cheaper alternatives.  They will be fired if a new supplier has performance issues.

They also have to worry at the corporate level about what TDG could do if they tried to get very aggressive at the corporate level.  The only thing preventing TDG from raising prices 10x across the entire portfolio tomorrow is the desire to keep the pricing increases reasonable so Boeing/Airbus don't kick them off future platforms. 
Title: Re: TDG - Transdigm
Post by: thefatbaboon on March 23, 2017, 06:13:50 AM
Spekulatius,

Perhaps you are not giving enough credit for the length of time TDG sells its products and the effects this has on its margins.

What do you think would happen to the R&D margins of normal r&d spending big pharma companies if you took the patent exclusivity that protects their successful drugs and instead of it giving effective exclusivity for 15 years, you tripled it and made it 45 years and left absolute r&d spend the same.

The r&d margin on the overall business would collapse.

Try playing around with the arithmetic of a 30- 50 year high margin tail. 
Title: Re: TDG - Transdigm
Post by: Spekulatius on March 23, 2017, 09:46:15 AM
^ The above explanation for the low R&D implies that TDG is just harvesting existing products from the companies they rolled up and not replacing them, in agggregate.
As we speak, the engineers at Boeing, Airbus, Lockheed etc. are designing the next generation Aircraft and TDG's engineers should be designing parts for those, unless they don't care about the business in. 10 years. That's the VRX model again. It's either that, or TDG's products are really build to print from their customers, which imo, creates a lower hurdle to replace TDG as a supplier long term.

I also ask myself what engineer would want to work for a company with such abysmal Glassdoor reviews. Admittedly, the Glassdoor reviews may be biased, due to TDG merger activities, but still - this is one of the lowest ratings I have ever seen. I probably would pass on a job offer from such a company. You will be the judge whether that matters or not for an TDG's investment thesis.

For me, the red flags with this one are quite obvious and very evident. I think this will be another case where the Rollup story ends up in tears.

Looking at this a bit more, I found that peer company Heico's R&D is even lower than TDG's, at around 3% of the revenues. So the argument that TDG's R&D is not compatible with their business model based in comparables in the industry is not valid. Just wanted to point this out there for the sake of disclosure. Doesn't make me a long, but facts are facts.
Title: Re: TDG - Transdigm
Post by: Grenville on March 23, 2017, 10:40:56 AM
"Meet The Martin Shkreli Of Defense Contracting"
http://www.huffingtonpost.com/entry/defense-contractor-monopoly-transdigm-mick-mulvaney_us_58d2f8dae4b0b22b0d19ad2a (http://www.huffingtonpost.com/entry/defense-contractor-monopoly-transdigm-mick-mulvaney_us_58d2f8dae4b0b22b0d19ad2a)
Title: Re: TDG - Transdigm
Post by: undervalued on March 23, 2017, 11:47:55 AM
Can we make a poll similar to VRX thread? Just want to see what everyone's perception about TDG is at, at this point in time.
Title: Re: TDG - Transdigm
Post by: thefatbaboon on March 24, 2017, 09:17:05 AM
FWIW, I'm happy to go on the record and back Transdigm.  Not in the sense that they are a huge position for me or anything like that but in the sense that it's a good business and should do well.  They have made one mistake in my opinion -  advertise themselves inaccurately and too much and attract unwelcome attention.  Transdigm uses significant financial leverage and pays top dollar for companies with the hope that they will have a long profitable tail products and all this leverage and money "on the come" makes their risk-weighted economics look better than they actually are.  They talk of 60 year tails as if they know what the hell will be going on in the aftermarket in 2077!  The truth is is that no one really knows if the aftermarket in 2077 is going to be anything like todays - we might be flapping around with bird wings or traveling in teleporters.   Also the shareholder returns are misleadingly good.  Put 7 turns of leverage on any good cash flowing business during a 15 year period where Fed Funds are zero and look what happens to Return on Equity and share price.  Seriously.... go pretend to buy tobacco companies, or cosmetic companies, or beer or whatever in 2000 and keep reinvesting (or repurchasing stock) using 50% borrowed money and maintaining debt at 7 times ebitda.  You'll make 20%-30% returns.  There is nothing evil or unAmerican in what they did, it's a levered equity stub on a highly diversified and competitively advantaged low-dollar product portfolio and they think they've a shot at making money from their products for half a century. Perhaps they will perhaps they won't.

Now they are under attack and the optics are superficially unappealing from a political and public point of view.  Because everyone looks at the historical returns and all the debt and all their talk about moats and pricing and owning the aftermarket.  It all sounds so predatory (even though personally I don't think it is). But I'm fascinated by how this battle might unfold because of the sheer tininess and ubiquity of the TDG portfolio.  There are thousands of planes with tens of thousands of parts most of them costing airlines a mere $100 a day - not per plane but for their WHOLE FLEET!  There are no real monolithic parts to attack.  Also their economics are in the existing fleet not in design and oem. Getting Boeing or Airbus or Lockheed to gradually stop designing them in...well, that will take ages and probably only start with the next generation of production and what is to stop TDG buying whoever is installed?  But either way it should have no effect on their cash flows for many years - in fact quite the opposite, getting shut out from new design might even increase earnings for the next 10 years.   So any damage to this decades cashflows would have to come from deterioration in the aftermarket -  can the airlines get together and fund competitive spares?  There are a lot of airlines from many different countries (who are fierce competitors) who would need to agree to get to critical mass to get requisite economics to justify the move on such minuscule parts.  Can they?  Perhaps - but wouldn't they have done so already, wouldn't Heico or whoever have done it already?  Also it would only be where TDG wasn't protected by strong IP.  Anyway its all very interesting to watch.  I will say this in closing, that I think this is a fantastic test for the Transdigm model.  We stand to learn a lot about their market power over the coming quarters.  More than we'd ever learn from attending analyst days or reading annual reports.

Last point on position sizing, any investor should keep the following in mind.  The debt stack is significant which means a % change in the enterprise value effects equity a lot.  Last year enterprise value was a punchy 14 times ebitda.  If the market rerates that to 12 times then the stock price will go down to $185, or 10 times then it would go to $125.  So one must size any investment accordingly - remembering that whatever you're putting in today (say $20,000) the company has borrowed about the same again (another $20,000).  So if you are confident enough to invest $20,000 in the Transdigm business model don't buy $20,000 worth of stock - buy somewhere around $10,000 because the company is borrowing another $10,000 on your behalf.     
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 24, 2017, 09:28:46 AM
Questions regarding TDG sales:
There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Do you know how many parts represent 10%, 25%, and 50% of total revenue? I'm thinking Heico probably wouldn't need to get a PMA for a large number of parts to compete against a high % of TDG's revenue.

I know any comparison to VRX has a ton of implications and I am not trying to imply anything like that with TDG. However, VRX had 1000s of drugs (and also said that no specific drug was a material portion of their revenue) but the top-30 drugs represented roughly 50% of total revenue. They were a lot more concentrated than most people expected once they went from reporting top-10 to top-30. Given TDG's business, I think it would be useful to know the revenue of their top-25 parts and/or how many parts represent 10%, 25%, and 50% of revenue. I imagine Heico would focus on the highest grossing parts and has no interest in getting a PMA for a part that has $10k/yr in sales.

TDG discloses that 90% of their revenue comes from parts with $2mm of revenue or less, that's on a $3.5bn revenue base.  PMAs are 2-3% of the market, and Heico says TDG parts are probably less penetrated then average because they aren't high enough volume to target.  They specifically say they tend to avoid TDG parts.  A $1-2mm part is worthy of being PMA'd, so it's safe to say the 90% of revenue is not 1500-3000 $1-2mm parts.  Many parts are also highly proprietary and can't be reverse engineered.

I'm aware of the stats that TDG provides on their portfolio (I didn't know the exact market share of PMA parts but I knew it was relatively low - it's also growing at a much higher rate than the overall aerospace parts market). I'm interested in the above questions because I think the stats they provide don't tell me enough about the portfolio to arrive at any real conclusions. This kind of goes to Spekulatius' questions and what you have been saying. TDG is a portfolio of commercial & defense aerospace parts and a large portion of these portfolio positions (parts) are in a 20-50 year run-off (I don't know exactly what TDG's estimated weighted-average remaining life is on these parts but we can probably safely assume it is within that range). The questions I asked are the same type of disclosure that nearly every type of investment portfolio provides, including portfolios of securities (ETFs, MFs, MBS, ect), major pharma companies, REITs, O&G, ect. Most aerospace suppliers are not structured like a portfolio so I don't blame TDG management for not disclosing this info already. If I were CEO, I would want to provide the least amount of disclosure possible. However, as a potential investor of a portfolio of run-off cash flows related to aerospace parts, I think I would need to know the answers to the questions I asked (along with a few others) to really understand the risk profile of the portfolio I'm invested in.

I think the stats TDG provides is somewhat misleading for a few reasons. 1) They don't really tell us much (details below); 2) TDG, like every other public company, is providing facts about their company that frame them in the best possible light. Thus, the stats you list should probably be considered from that POV; 3) As you know (but others may not), Heico is not the only generic (or PMA, to be specific to this industry) manufacturer around. There are dozens or hundreds of small, private PMA manufacturers that generally focus on specific systems within specific aircraft classes. There are a ton of companies that are trying to pick off profitable parts. The issue has been the OEM and airline's reluctance

So going off what we know from TDG, company websites prior to being acquired by TDG, some publicly available industry stats, and the fact that almost every company frames their stats in the best light (which gives us a reasonable boundary condition), I think we have the following:
The 10% that comes from > $2m/part parts:
What is the gross margin on these? Is it > or < overall margin? Are there a couple dozen parts that average >$10m/part and have 90% gross margin? Are the highest grossing parts for 737 and 747 models or are they for newer aircraft models? The 737 and 747 were discontinued recently so if it is the former then the twilight years have begun. While historically, the twilight years last for 30-50 years or so, have confident are we that that will be true going forward? What economic dynamics (incentives) caused that to be true previously? Are those conditions still true today and can we be reasonably confident they will be true going forward? If any of these are true, then there is a little more risk. But I don't know these answers because I don't know if it's even worth investigating because in general I don't know where the profit is generated. Anytime the narrative is difficult to prove, the business isn't visible to the average institutional investor, and investment pitches quote the narrative with little to no change between authors, I become suspect of the validity. As I've said, TDG obviously has a great business, but is it as good as everyone says? They have a run-off portfolio of 20-60 year cash flows and they purchase nearly all of their growth. Does it make sense to pay 25x-30x for that?

Also, since TDG has historically distributed nearly all of their profits by special dividend and those dividends are paid to vested employee options as well as stockholders, I think it makes sense to adjust the expected FCFs to account for the < 100% of cash flows common stock holders will receive. I never see anyone do that. It's only a ~8% or so adjustment but it is material. That's what I was getting at with the questions. How do I value a portfolio if it is a black box of variable cash flows?

My issues with the stats TDG reports:
The < $2m/part parts (90% of sales):
* In general, is gross margin higher for parts with low sales or high sales? I'd guess the $1m - $2m parts have higher gross margin than the one-off parts with <$500k/yr in sales but I don't know (because I don't know what those parts are).
* Is there a sneaker-like issue here where the gross margin is clumped into a few types of parts that have hundreds of different sizes? Thus, TDG is technically correct that they sell thousands and thousands of parts, but realistically they depend on a few valves or actuators, for a few base models of aircraft that have numerous sizes for all the different types of aircraft models (different valves for every type of Boeing 747, ect)? If so, then the <$2m/part statistic is misleading. Once you PMA one of those sizes, it should be fairly straightforward to obtain a PMA for each of the other sizes, though it will still take time.


I have the same opinion as everyone else. It's a great business, great industry dynamics, but I don't think the fort is as unbreachable as folks let on and I'm always suspect when no one can come up with any risks to the business.
Title: Re: TDG - Transdigm
Post by: cmlber on March 24, 2017, 01:31:00 PM
I didn't know the exact market share of PMA parts but I knew it was relatively low - it's also growing at a much higher rate than the overall aerospace parts market.

“Much” higher rate is a bit of a stretch.  PMA is growing 5% vs. market of 4%.  But to be fair to the bear case, that’s because engine PMAs are basically flat and everything else is growing 7-8%.  8% vs. 4% growth would mean in 20 years, PMAs go from 2.5% to 5% market share.  Hardly going to kill TDG.

The 10% that comes from > $2m/part parts:
What is the gross margin on these? Is it > or < overall margin? Are there a couple dozen parts that average >$10m/part and have 90% gross margin?

Odds are, these margins are about the same as, but a little higher than, everything else.  Why do I say that?  Everything in the after-market has very high margins, so the difference between 70% and 90% isn’t going to create the issue you’re talking about, where 10% of the revenue could be substantially greater than 10% of the profit.  But in order to get to that size without attracting PMA competition, those parts likely are more challenging to replicate.  A $10m part would get PMA competition immediately otherwise.  If you take Heico’s revenue divided by marketed parts, we can estimate that their average part generates ~$80k of revenue.  They say they target 20% of the market volume for a part and usually discount 50%.  So that means an OEMs $800,000/yr revenue part is an average target…

They have a run-off portfolio of 20-60 year cash flows and they purchase nearly all of their growth. Does it make sense to pay 25x-30x for that?

See earlier post, but they do not just have 20-60 year cash flows and purchase all growth.  They also have the benefit of being the status quo in a risk-averse industry.  The buyers at Boeing/Airbus are incentivized to keep the status quo, so unless an alternative is better, TDG parts are typically rolled from one platform to the next, hence the chart they show that they have more content on the new generations of aircraft than on the old generations.

My issues with the stats TDG reports:
The < $2m/part parts (90% of sales):
* In general, is gross margin higher for parts with low sales or high sales? I'd guess the $1m - $2m parts have higher gross margin than the one-off parts with <$500k/yr in sales but I don't know (because I don't know what those parts are).

I think your guess is the opposite actually.  It is the oldest parts, with the lowest volumes, that get the highest gross margins.  Why?  Because nobody in their right mind is going to PMA a part that sells 10 parts/year, so TDG can charge whatever it wants for those parts.  The counter to that though would be more proprietary content correlates to both higher prices and higher gross margins.
Title: Re: TDG - Transdigm
Post by: Schwab711 on March 24, 2017, 02:50:52 PM
Thanks cmlber, this is helpful. I'll have to think about this more.
Title: Re: TDG - Transdigm
Post by: Liberty on May 09, 2017, 04:32:59 AM
Fiscal Q2:

http://www.transdigm.com/mobile.view?c=196053&v=203&d=1&id=2271210
Title: Re: TDG - Transdigm
Post by: Liberty on June 01, 2017, 12:08:41 PM
http://www.transdigm.com/mobile.view?c=196053&v=203&d=1&id=2278225

Quote
TransDigm Group Incorporated (NYSE: TDG) announced today that it has recently acquired three add-on aerospace product lines for a total purchase price of approximately $100M. The product lines have combined revenues of approximately $32M.
Title: Re: TDG - Transdigm
Post by: Gamecock-YT on June 12, 2017, 07:50:40 AM
CNBC obtained a copy of a letter Senator Warren sent to the DoD on May 19th calling for an investigation into Transdigm's business. $TDG
Title: Re: TDG - Transdigm
Post by: DCG on June 12, 2017, 07:54:19 AM
Interesting. I sold my TDG holdings earlier this year (for around the same price it's currently trading at), as I simply realized I didn't have a good enough understanding of their business and industry.
Title: Re: TDG - Transdigm
Post by: walkie518 on June 13, 2017, 01:47:04 PM
Warren represents the ugliest side of the current political discourse.  I don't understand why she has any credibility. 
Title: Re: TDG - Transdigm
Post by: Liberty on August 08, 2017, 07:41:02 AM
http://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2292486

Quote
Highlights for the third quarter include:

Net sales of $907.7 million, up 13.8% from $797.7 million;
Net income of $169.1 million, up 5.2% from $160.6 million;
Earnings per share of $3.08, up 6.9% from $2.88;
EBITDA As Defined of $442.9 million, up 15.4% from $383.9 million;
Adjusted earnings per share of $3.30, up 6.8% from $3.09; and
Reaffirms previously stated fiscal 2017 financial guidance.

There might be a new special dividend in the range of $1.0 billion to $1.25 billion.
Title: Re: TDG - Transdigm
Post by: Liberty on August 23, 2017, 03:13:44 PM
https://seekingalpha.com/pr/16922702-transdigm-group-announces-successful-completion-additional-term-loan-declares-special-cash

$22/share special dividend.
Title: Re: TDG - Transdigm
Post by: Jurgis on August 23, 2017, 03:24:19 PM
Will there be another article by shorts after divvie is paid? Get the popcorn!  8)
Title: Re: TDG - Transdigm
Post by: Liberty on November 09, 2017, 01:41:09 PM
I haven't followed this one in a while, but something's appears to be going on (if anyone who's been following can give me a recap, I'd appreciate it). I think I'll dig a bit deeper tomorrow to see what this asset disposition because of the DoJ is about:
 
Fiscal Q4:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2315782

Quote
Highlights for the fourth quarter and fiscal year include:

Fourth quarter net sales of $923.9 million, up 5.6% from $875.2 million;
Fourth quarter net income from continuing operations of $184.1 million, up 19.1% from $154.7 million;
Fourth quarter earnings per share from continuing operations of $2.21, down 20.2% from $2.77;
Fourth quarter EBITDA As Defined of $460.1 million, up 8.7% from $423.3 million;
Fourth quarter adjusted earnings per share of $3.48, up 5.8% from $3.29;

Fiscal 2017 net sales of $3,504.3 million, up 10.5% from $3,171.4 million;
Fiscal 2017 net income from continuing operations of $628.5 million, up 7.2% from $586.4 million;
Fiscal 2017 earnings per share from continuing operations of $8.45, down 18.7% from $10.39;
Fiscal 2017 EBITDA As Defined $1,710.6 million, up 14.4% from $1,495.2 million; and
Fiscal 2017 adjusted earnings per share of $12.38, up 7.7% from $11.49.

Quote
During the fourth quarter of 2017, TransDigm began the process of disposing of our Schroth operations in connection with an agreement with the Department of Justice.  Accordingly, the Schroth results are presented as discontinued operations, and as such, $10.1 million of net sales are excluded from continuing operations for the quarter and $24.6 million of net sales are excluded for the full fiscal year. Schroth was previously acquired in February 2017.

Quote
Fiscal 2017 net sales, which excludes $24.6 million from discontinued operations, rose 10.5% to $3,504.3 million from $3,171.4 million in the comparable period last year.  Organic net sales growth was 2.4%.

Update: Found Nick Howley's comments on the disposition and posted them here: https://twitter.com/LibertyRPF/status/928793285757427712
Title: Re: TDG - Transdigm
Post by: Liberty on December 21, 2017, 11:15:22 AM
https://www.justice.gov/opa/pr/justice-department-requires-transdigm-group-divest-airplane-restraint-businesses-acquired
Title: Re: TDG - Transdigm
Post by: Liberty on January 02, 2018, 03:43:06 PM
CFO out:

https://seekingalpha.com/news/3320753-transdigm-taps-skulina-interim-cfo-paradie-resigns
Title: Re: TDG - Transdigm
Post by: Spekulatius on January 03, 2018, 06:12:29 AM
CFO leaving, especially for such an outfit ( highly leveraged, lots of acquisitions), is potentially a big red flag.
Title: Re: TDG - Transdigm
Post by: Liberty on January 03, 2018, 10:56:46 AM
CFO leaving, especially for such an outfit ( highly leveraged, lots of acquisitions), is potentially a big red flag.

The fact that he was coming from Cliffs in the first place had made me raise an eyebrow like Spock...
Title: Re: TDG - Transdigm
Post by: matthylland on February 13, 2018, 11:14:21 AM
Has anyone been to TDG's annual meeting before? Is it interesting or worth a few hour drive?

Annual Meeting

MEETING DATE: March 20, 2018

For Holders as of: January 22, 2018
Title: Re: TDG - Transdigm
Post by: Liberty on February 19, 2018, 06:05:44 AM
https://www.bloomberg.com/news/features/2018-02-14/boeing-is-killing-it-by-squeezing-its-suppliers
Title: Re: TDG - Transdigm
Post by: walkie518 on February 19, 2018, 10:05:24 AM
https://www.bloomberg.com/news/features/2018-02-14/boeing-is-killing-it-by-squeezing-its-suppliers

this kind of behavior will spur a wave of consolidation among suppliers? 
Title: Re: TDG - Transdigm
Post by: Liberty on February 19, 2018, 10:18:27 AM
https://www.bloomberg.com/news/features/2018-02-14/boeing-is-killing-it-by-squeezing-its-suppliers

this kind of behavior will spur a wave of consolidation among suppliers?

It already has:

Quote
This, along with the ceaseless price squeezing (from Airbus as well as Boeing), has set off a wave of acquisitions as suppliers try to build leverage. Last April, Rockwell Collins Inc., which makes aircraft electronics, paid $8.6 billion for B/E Aerospace Inc., a supplier of cabin equipment including seats and lavatories. Just after the deal closed, Gregory Hayes, CEO of United Technologies, called his counterpart at Rockwell Collins, Kelly Ortberg, with a proposal. “I said, ‘Kelly, we need to do something,’ ” Hayes recalls. “ ‘The forces of nature in the aerospace business are such that we need to figure out how we’re going to reduce costs.’ ”
In September, UTC agreed to pay $23 billion for Rockwell Collins—weeks after Boeing set up a unit called Boeing Avionics to make its own cockpit equipment.

btw, I posted this in the TDG thread because there's no BA thread, but I don't mean to imply anything about the impact on TDG.
Title: Re: TDG - Transdigm
Post by: Leverage Capabilities on February 21, 2018, 04:03:58 PM
I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket
Title: Re: TDG - Transdigm
Post by: Liberty on February 22, 2018, 04:42:57 AM
I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket

Indeed. The article says that's one of their goals, but we'll have to see how effective they are at it, and whether they target specific sole-source parts that TDG has.
Title: Re: TDG - Transdigm
Post by: Sharad on February 22, 2018, 08:06:28 AM
I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket

When a company moves out of its core competency, most of the time, bad things happen. I know BA would look like they would do well with acquisitions of aftermarket parts suppliers, but what looks logical in theory could be an epic failure in practice. Home Depot attempted to step into FAST's space, and had to spin off HD Supply after it failed to make money. I'd think BA entering the market could longer term prove to be a bullish thing for TDG, if you think about how difficult it is to master valuation, efficient merging, creating synergies and matching corporate cultures. I don't recall BA being a major acquirer in the past, so is it in their DNA? If not, any potential investment in the aftermarket space could present a great opportunity for TDG, especially if shares fell in sympathy.
Title: Re: TDG - Transdigm
Post by: Leverage Capabilities on February 22, 2018, 03:34:57 PM
I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket

When a company moves out of its core competency, most of the time, bad things happen. I know BA would look like they would do well with acquisitions of aftermarket parts suppliers, but what looks logical in theory could be an epic failure in practice. Home Depot attempted to step into FAST's space, and had to spin off HD Supply after it failed to make money. I'd think BA entering the market could longer term prove to be a bullish thing for TDG, if you think about how difficult it is to master valuation, efficient merging, creating synergies and matching corporate cultures. I don't recall BA being a major acquirer in the past, so is it in their DNA? If not, any potential investment in the aftermarket space could present a great opportunity for TDG, especially if shares fell in sympathy.

Totally agree. I'd also guess that Airbus, Bombardier, etc. would no longer purchase parts from a now BA-owned suppler. If these companies compete against TDG, that would give TDG even more pricing power for these other OEMs.
Title: Re: TDG - Transdigm
Post by: Jerry Capital on March 19, 2018, 11:52:10 AM
TransDigm Group Incorporated (NYSE: TDG) announced today that it has entered into a definitive agreement to acquire Extant Components Group Holdings, Inc. ("Extant"), a portfolio company of Warburg Pincus LLC, for approximately $525 million. TransDigm expects to finance the acquisition primarily through a combination of cash on hand and existing availability under its revolving credit facility.

Extant expects to derive 80% of its revenue from the aftermarket, with nearly all of the revenue from proprietary and sole source products. The revenue is derived from a mix of military and commercial applications, with the majority of the revenue coming from the military end market

https://www.prnewswire.com/news-releases/transdigm-to-acquire-extant-aerospace-300615835.html
Title: Re: TDG - Transdigm
Post by: Liberty on April 30, 2018, 02:43:35 PM
Howley chairman, Stein new CEO:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2345699

That was quicker than I expected.
Title: Re: TDG - Transdigm
Post by: Liberty on May 01, 2018, 04:30:11 AM
Fiscal Q2:

https://www.transdigm.com/investor-relations/news-releases/news-article/
Title: Re: TDG - Transdigm
Post by: Liberty on July 13, 2018, 06:19:39 AM
New small acquisition:

https://www.transdigm.com/investor-relations/news-releases/news-article/
Title: Re: TDG - Transdigm
Post by: Liberty on August 07, 2018, 06:03:42 AM
Fiscal Q3:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2362418

Quote
Highlights for the third quarter include:

Net sales of $980.7 million, up 9.2% from $897.7 million;
Net income from continuing operations of $217.4 million, up 28.0% from $169.8 million;
Earnings per share from continuing operations of $3.91, up 26.5% from $3.09;
EBITDA As Defined of $487.1 million, up 8.8% from $447.6 million;
Adjusted earnings per share of $4.01, up 19.0% from $3.37; and
Revisions to fiscal 2018 financial guidance.
Title: Re: TDG - Transdigm
Post by: walkie518 on August 07, 2018, 08:45:51 AM
Fiscal Q3:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2362418

Quote
Highlights for the third quarter include:

Net sales of $980.7 million, up 9.2% from $897.7 million;
Net income from continuing operations of $217.4 million, up 28.0% from $169.8 million;
Earnings per share from continuing operations of $3.91, up 26.5% from $3.09;
EBITDA As Defined of $487.1 million, up 8.8% from $447.6 million;
Adjusted earnings per share of $4.01, up 19.0% from $3.37; and
Revisions to fiscal 2018 financial guidance.
drop must be on guidance change?
Title: Re: TDG - Transdigm
Post by: Liberty on October 10, 2018, 07:04:48 AM
TDG buying Esterline Technologies for $4bn:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2371033
Title: Re: TDG - Transdigm
Post by: Leverage Capabilities on October 10, 2018, 11:06:58 AM
Will need to dig into ESL a little more, but I'm getting ~12x '19E EBITDA (consensus) which is at the high end of their target multiple (9-12x). I'd say given how hot the M&A markets have been overall, this isn't a terrible price to pay. Will be curious to see how easy it is to get to their targeted 50% multiple reduction.

I guess we won't be getting another special dividend any time soon
Title: Re: TDG - Transdigm
Post by: voyager on October 10, 2018, 06:58:32 PM
I'd bet that there is a lot of overhead overlap between the two companies.....

They also acquired something from them before, so they probably got insight into their operations and know they can run them better.
Title: Re: TDG - Transdigm
Post by: Liberty on November 06, 2018, 07:51:28 AM
TDG Q3 (fiscal Q4):

https://www.transdigm.com/wp-content/uploads/2018/11/Q4-FY18-Earnings-Call-Presentation-Final.pdf
Title: Re: TDG - Transdigm
Post by: Liberty on February 05, 2019, 06:28:02 AM
Q4:

http://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2386031

Quote
Net sales of $993.3 million, up 17.1% from $848.0 million;
Net income from continuing operations of $196.0 million, down 37.2% from $312.0 million;
Earnings per share from continuing operations of $3.05, down 33.7% from $4.60;
EBITDA As Defined of $486.7 million, up 21.2% from $401.5 million;
Adjusted earnings per share of $3.85, down 31.0% from $5.58, with the prior year period including $2.65 per share of one-time favorable impact from the enactment of tax reform; and
Upward revision to fiscal 2019 financial guidance.
Title: Re: TDG - Transdigm
Post by: writser on April 09, 2019, 01:11:09 PM
bear case: https://twitter.com/jtepper2/status/1115634962533892097
Title: Re: TDG - Transdigm
Post by: khturbo on April 09, 2019, 01:45:06 PM
I might as well respond to this here. I'm the person that posted the joke gif above. The tweet about doing more than reading one article was too snappy on my part, I do admit.

I talked with Tepper about the company privately as I mentioned might be better on the twitter thread.

First and foremost, if you're interested in the company and haven't read the Dod IG report, that's the first thing you should do. The whole thing is at the bottom of this page:

https://www.dodig.mil/reports.html/Article/1769041/review-of-parts-purchased-from-transdigm-group-inc-dodig-2019-060/

Read the whole report at the link at the bottom, not just the summary.

First and foremost, the actual business impact isn't super enormous. Using some data from the report, it seems like the revenue run-rate is in the $100-150mm range to the DoD. If they legislated tomorrow the 15% margin that they use then TDG's EBITDA might go down by $50mm, which would be a ~$15 / share in impact. They've legislated thing to go the other way where they increased the TINA thresholds, so the odds of this are pretty slim, even longer term.

More importantly, I think it's important to address his claim that Transdigm is "evil." Lots of people think this or think that their customers hate them or whatever.

If you know aerospace, you know how important on time delivery is. Just look at what happened to Airbus when they had trouble with their engine supplier. They couldn't deliver their planes. I read an article a little while back about the US government owning 2x the number of F-35s that they need to be combat ready because they know that lots of planes will be waiting on parts and repairs. Those planes cost $100mm a piece. One of the things that Transdigm is very, very good at is delivering on time. There was a slide in a presentation a few years back showing on-time delivery in the mid 90% range. Anyone that knows manufacturing knows that's incredibly high. So when they take over a company, they significantly improve on time delivery metrics. Prices go up as well. But it's not just like the customer is getting screwed. They're getting the parts when they need them, which is much more important than some extra price on such a cheap part.

Secondly, and very importantly, these aren't true monopolies. If you talk to the people that run these businesses, there are market mechanisms where they would lose their positions if they increased prices too much. In some cases it might take 2-3 years, but it can still happen. This is much different than in a situation like pharma where in some cases no one else is allowed to make a drug and you have an absolute monopoly. In aerospace, it's a current monopoly, sure, but with abuse you lose your position. Commercial companies go around OEMs all the time as we've seen with Heico. There are other mechanisms besides PMA parts. If you realize that there are other options, then you realize that charging a lot doesn't force your customer to use you long term, and you realize that it's hard to be evil when your customer has a choice.

Knowing that you can switch suppliers, but also knowing it's a long, difficult process, is it a surprise that the DoD hasn't done this historically? When they aren't exactly spending their own money? They did a similar report in 2006, so they obviously know about TDG. They could have done any number of things to stop working with TDG in the meantime, but they haven't. They keep coming to TDG and saying they need a part tomorrow, so TDG charges a high price. They've asked for a partial refund, which I'm sure TDG will grant. If they really want to stop working with TDG, they are free to do so.

I think the notion that TDG is evil is inseparable from the notion that there's nowhere to turn besides them, which is incorrect. If TDG all of a sudden said that one random part would cost $10mm, do you think that TDG would sell lots of those parts? Obviously not. TDG doesn't do this because they'd lose all of their sales in short order.
Title: Re: TDG - Transdigm
Post by: Spekulatius on April 09, 2019, 04:08:46 PM
If you ask me, the report is damning. The military has a mechanism to single source parts provided that essentially a cost plus method is used and Transdigm appears to abuse it.

Looks like Valeant to me.
Title: Re: TDG - Transdigm
Post by: Jurgis on April 09, 2019, 04:28:01 PM
If you ask me, the report is damning. The military has a mechanism to single source parts provided that essentially a cost plus method is used and Transdigm appears to abuse it.

Looks like Valeant to me.

Not to defend Transdigm, but:

- Like you say, military has power and mechanism. So if they want, they should kick Transdigm's butt. If they don't, then they themselves are part of problem (of transferring taxpayers' money to TDG).
- Unlike patients in Valeant's case, I have little sympathy for airlines or aircraft manufacturers or whatever other companies that source replacement parts. They are also big boys and can kick TDG's butt if they want. If they don't, then they themselves are part of problem (of transferring their shareholders' money to TDG).

BTW, I'm not arguing against what khturbo said. It's possible that there are legit reasons to pay TDG through the nose. But if TDG is extorting, then its customers are not as powerless as patients who have to pay pharmas through the nose.
Title: Re: TDG - Transdigm
Post by: khturbo on April 09, 2019, 05:01:16 PM
If you ask me, the report is damning. The military has a mechanism to single source parts provided that essentially a cost plus method is used and Transdigm appears to abuse it.

Looks like Valeant to me.

Not to defend Transdigm, but:

- Like you say, military has power and mechanism. So if they want, they should kick Transdigm's butt. If they don't, then they themselves are part of problem (of transferring taxpayers' money to TDG).
- Unlike patients in Valeant's case, I have little sympathy for airlines or aircraft manufacturers or whatever other companies that source replacement parts. They are also big boys and can kick TDG's butt if they want. If they don't, then they themselves are part of problem (of transferring their shareholders' money to TDG).

BTW, I'm not arguing against what khturbo said. It's possible that there are legit reasons to pay TDG through the nose. But if TDG is extorting, then its customers are not as powerless as patients who have to pay pharmas through the nose.

That's exactly right. There are mechanisms to pick other suppliers. Customers aren't powerless, which makes the whole argument that TDG is evil / Valeant incorrect.

@spekulatius - this is a question of scale. There were sales numbers in the report, and you can back into TDG's revenue to DoD is in the range of $100-150mm. If you take the margins down to cost of capital, which would require direct legislation, which itself would be legislation going the other way than recent legislation that just passed, then the loss in EBITDA would be about half of that. TDG's EBITDA is $2bb before the ESL acquisition. This isn't exactly doomsday.

And just to be clear, they don't break any laws. They don't report cost for a specific set of parts, which is within their legal right to do as the laws are currently written. Again, it will take new legislation to change that.
Title: Re: TDG - Transdigm
Post by: Gregmal on April 09, 2019, 05:24:19 PM
Whenever there is a big, unique case or event, many times the ripple effect is that people end up seeing future things/events/cases in a manner tainted by that event. Whether it be the GFC, or on an individual scale, Valeant, there is always going to be a story that sells, built around something else being "the next (insert GFC, housing bubble, VRX, etc)". But from experience, the next "GFC, VRX" is almost always NEVER the next GFC, VRX.
Title: Re: TDG - Transdigm
Post by: Spekulatius on April 09, 2019, 05:44:12 PM
Whenever there is a big, unique case or event, many times the ripple effect is that people end up seeing future things/events/cases in a manner tainted by that event. Whether it be the GFC, or on an individual scale, Valeant, there is always going to be a story that sells, built around something else being "the next (insert GFC, housing bubble, VRX, etc)". But from experience, the next "GFC, VRX" is almost always NEVER the next GFC, VRX.

It’s not the same than Valeant, but it rhymes. Heavily regulated  market and protected product, government customer, price gouging, Rollup strategy, highly levered Balance sheet. It doesnt mean that it will blowout, but all the ingredients are there.

I agree the military has power it can exercise. Just from my experience , the defense business is somewhat clubby. I think there is also the revolving door issue where a lot of retirees from the military find a second carrier in the defense sector and they don’t want to poison the well...
Title: Re: TDG - Transdigm
Post by: Liberty on May 07, 2019, 05:36:10 AM
fiscal Q2:

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2397456

Quote
Net sales of $1,195.9 million, up 28.2% from $933.1 million;
Net income from continuing operations of $202.4 million, up 0.3% from $201.8 million;
Earnings per share from continuing operations of $3.60, down 0.8% from $3.63;
EBITDA As Defined of $571.8 million, up 23.5% from $463.1 million;
Adjusted earnings per share of $4.21, up 11.1% from $3.79; and
Upward revision to fiscal 2019 sales, EBITDA As Defined and adjusted earnings per share guidance.

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzA2NTIxfENoaWxkSUQ9NDE5MTc0fFR5cGU9MQ==&t=1
Title: Re: TDG - Transdigm
Post by: Liberty on May 15, 2019, 11:55:14 AM
https://www.bloomberg.com/news/articles/2019-05-14/pentagon-contractor-s-9-400-profit-on-half-inch-pin-challenged

http://fortune.com/2019/05/15/transdigm-pentagon-gouging/

https://oversight.house.gov/legislation/hearings/dod-inspector-general-report-on-excess-profits-by-transdigm-group-inc