TDG - Transdigm

[jay21]

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/

[Liberty]

Good find, Jay. I didn't know about Mike.

[Liberty]

http://www.transdigm.com/phoenix.zhtml?c=196053&p=irol-newsArticle&ID=1955222&highlight=

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.

[Liberty]

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)

[jouni1]

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?

[Liberty]

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.

[jouni1]

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

[Liberty]

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.

[jouni1]

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.

[Liberty]

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.