TransDigm Boosts 2017 Outlook After Posting Solid Results

By Dan Caplinger Markets Fool.com

The last few months have been an unusual time for aerospace supplier TransDigm Group (NYSE: TDG). Typically remaining in the background, TransDigm found itself thrust into the limelight when Citron Research's Andrew Left featured the company in a negative report, suggesting it could be "the Valeant of the aerospace industry." Yet despite a big share-price plunge in the wake of the Citron report, those following the stock continued to expect growth from the aerospace supplier.

Continue Reading Below

Coming into Tuesday's fiscal first-quarter financial report, TransDigm investors believed the company would still be able to post double-digit sales gains and further bottom-line improvement, and TransDigm didn't disappoint on that front. Moreover, the company boosted its guidance for the remainder of 2017, reversing its somewhat lackluster predictions from a few months ago. Let's take a closer look at TransDigm Group to see what made it do well during the quarter.

Image source: TransDigm Group.

TransDigm restarts its engines

TransDigm Group's fiscal first-quarter results gave investors most of what they wanted to see. Revenue climbed 16% to $814 million, which slightly outpaced the 15% growth those following the stock were expecting. GAAP net income fell largelybecause of refinancing costs and the collateral impact of the company's $24 per share special dividend in October. But adjusted net income climbed 13% to $145.3 million, and adjusted earnings came in at $2.55 per share, topping the consensus forecast among investors of $2.49 per share.

Taking a closer look at the results, TransDigm managed to recover somewhat from a poor showing last quarter. Organic sales moved back into positive territory, rising 3.5% from the year-ago quarter. Still, the numbers show that acquisitions continued to play a vital role, making up the vast majority of TransDigm's top-line gains during the quarter.

Continue Reading Below

The biggest event of the quarter for TransDigm, though, had little to do with business operations. Last year, the company made a decision to boost its leverage level, and over the past 12 months, outstanding debt has risen from $8.4 billion to $11 billion. TransDigm used a substantial chunk of that money to pay a $24 per share special dividend, which worked out to $1.36 billion in cash outlays. Certain dividend equivalent payments related to that payout had a negative impact on GAAP earnings thanks to accounting rules, and the aerospace supplier also said the increase in debt led to higher financing costs during the quarter.

TransDigm CEO Nicholas Howley focused largely on operating conditions in the industry. "Incoming orders were particularly strong in the commercial aftermarket," Howley said, "while the much smaller business jet and helicopter markets remained weak." The CEO also pointed to the company's refinancing efforts as playing an instrumental role in making the dividend possible and reaching a more optimal mix of maturities going forward.

Can TransDigm keep gaining altitude?

TransDigm has also gotten a bit more optimistic about its near-term future. In Howley's words, "Based on our first quarter results and our current view of the full year, we are modestly increasing our full year guidance to primarily reflect slightly higher revenues and a modest increase in margin."

The new revenue guidance wasn't all that much higher, but its effect on the bottom line was more evident. TransDigm's new projections call for $3.52 billion to $3.57 billion in sales, which is up $5 million from the previous estimate. However, the boost to adjusted earnings was more substantial, with an increase of roughly $0.18 per share creating a new range of $12.02 to $12.30 per share.

TransDigm also took advantage of the drop in shares following the release of the Citron Research report. After the quarter ended, TransDigm repurchased nearly 667,000 shares of stock, spending $150 million from its current repurchase authorization. The stock has since bounced off of its lows, but it's possible TransDigm will continue to look at buybacks as a potential use of capital going forward.

Investors seemed pleased with the report, helping to send TransDigm shares up more than 2% in pre-market trading following the announcement. If the aerospace supplier can keep up its performance going forward, then TransDigm might well prove Citron's allegations to be unjustified going forward.

10 stocks we like better than TransDigm Group
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and TransDigm Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.