Author Topic: TDG - Transdigm  (Read 140111 times)

cmlber

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Re: TDG - Transdigm
« Reply #200 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.


Schwab711

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Re: TDG - Transdigm
« Reply #201 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).
« Last Edit: February 09, 2016, 11:06:20 AM by Schwab711 »

cmlber

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Re: TDG - Transdigm
« Reply #202 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.

Schwab711

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Re: TDG - Transdigm
« Reply #203 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.

cmlber

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Re: TDG - Transdigm
« Reply #204 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. 

Schwab711

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Re: TDG - Transdigm
« Reply #205 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.

cmlber

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Re: TDG - Transdigm
« Reply #206 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.   

Larry

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Re: TDG - Transdigm
« Reply #207 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.

gfp

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Re: TDG - Transdigm
« Reply #208 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

Eye4Valu

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Re: TDG - Transdigm
« Reply #209 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.