Author Topic: TDG - Transdigm  (Read 138331 times)

thefatbaboon

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Re: TDG - Transdigm
« Reply #160 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.) 


Liberty

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Re: TDG - Transdigm
« Reply #161 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.
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Picasso

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Re: TDG - Transdigm
« Reply #162 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.

Larry

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Re: TDG - Transdigm
« Reply #163 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.
« Last Edit: October 14, 2015, 07:06:31 AM by Larry »

DeepSouth

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Re: TDG - Transdigm
« Reply #164 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.

cmlber

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Re: TDG - Transdigm
« Reply #165 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. 

Liberty

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Re: TDG - Transdigm
« Reply #166 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).
« Last Edit: October 14, 2015, 10:11:34 AM by Liberty »
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frommi

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Re: TDG - Transdigm
« Reply #167 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?

Liberty

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Re: TDG - Transdigm
« Reply #168 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.
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frommi

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Re: TDG - Transdigm
« Reply #169 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.