TransDigm’s Growth Opportunity Persists With Recovery in Commercial Air Travel

After taking a fresh look at TransDigm TDG and reviewing our long-term assumptions, we have increased our fair value estimate to $700 per share from $663, primarily reflecting the company’s runway for continued investment and gradual margin expansion. We reaffirm our wide economic moat and stable moat trend ratings.

We see no shortage of opportunities for TransDigm to continue to build its portfolio of profitable niche products in the commercial and military aviation aftermarket. The company’s persistent focus on supplying esoteric and highly engineered aircraft parts engenders powerful switching costs for its customers, and we don’t foresee this dynamic changing in this market segment anytime soon.

We anticipate that TransDigm can grow faster than the overall aircraft parts and service market because of its consistent organic growth supplemented by acquiring smaller companies. TransDigm has demonstrated capacity to increase pricing, even in times of distress in the aerospace market, and we expect increasing flight activity to drive a long-term recovery in this market. We expect sales will grow more than 8% annually on average over our the next five years. We also expect that TransDigm will continue to acquire smaller firms in its strategic target market—we forecast the firm spending around $4.5 billion on acquisitions in the next five years, adding approximately $1.4 billion in overall revenue.

As commercial aviation was grounded due to the pandemic, TransDigm’s revenue from military aviation grew to nearly 50% of sales in 2021, up from 33% in 2017. As commercial aviation ramps up again, we see TransDigm’s book of business returning to its historical revenue proportions of around 60% commercial and 40% military. We forecast slightly higher profitability in the more tightly regulated commercial product lines, thus affording the company profitability expansion from the 38% average operating margin we saw over the last five years, reaching 44.8% in 2026 and 2027.