TransDigm Keeps Riding Aerospace to New Heights

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Aerospace plays a vital role in the success of TransDigm Group (NYSE: TDG), which relies on healthy demand for the aircraft components and systems that it produces. Over the past several years, TransDigm has done a good job of riding the wave of interest in commercial aircraft to push its stock to new heights, and coming into Tuesday's fiscal third-quarter financial report, TransDigm investors were confident that the company would manage to continue its impressive track record of success. TransDigm's results didn't give investors everything they were hoping to see, but big gains on the company's bottom line showed that it is doing its best to capitalize on the opportunities that it has had recently. Let's take a closer look at what TransDigm Group said about its most recent quarter and what lies ahead for the company going forward.

TransDigm keeps enjoying its tailwinds

TransDigm Group's fiscal third-quarter results were positive, although the company didn't crush all investor expectations in the way it has in past quarters. Revenue grew 15% to $797.7 million, which actually fell short of the roughly $806 million consensus figure among those following the aerospace component supplier. Yet net income jumped by more than 40%, and after making allowances for extraordinary items, adjusted earnings came in at $3.09 per share. That was roughly 10% higher than the $2.81 per share that most investors were expecting to see from TransDigm.

Taking a closer look at the numbers, TransDigm had a lot of positive things to say during the quarter. The company made significant progress in producing more of its growth from internal sources, with organic sales growth of 8.3% accelerating by almost double from the previous quarter's gains. Yet the increase in profitability came from a number of sources, including not only overall sales growth but also efforts to boost its operating margin and cut costs. TransDigm said that its proprietary products showed solid performance in particular, and that helped improve margin performance. In addition, lower interest expenses and costs of refinancing outstanding debt also contributed toward reducing overall expenditures and boosting the bottom line.

TransDigm CEO Nicholas Howley was generally happy with the way things are going for the company, although he did note some areas of weakness as well. "Our commercial transport aerospace businesses continue to grow nicely in both the [original equipment manufacturer] and aftermarket," Howley said, "slightly offset by weakness in the smaller business jet, helicopter and freighter markets." The CEO also pointed to some uncertainty in the defense arena, noting that sales have been up, but bookings fell during the quarter.

Can TransDigm keep climbing?

In what has become nearly a quarterly ritual for shareholders, TransDigm offered some increased guidance for its full 2016 fiscal year. Going forward, TransDigm expects net sales of $3.17 billion to $3.19 billion, up by around $10 million to $20 million from the company's previous forecast. Similarly, new guidance for adjusted earnings of between $11.21 and $11.39 per share represents an increase of between $0.11 and $0.17 per share. Howley said that the update generally reflects the company's improved core performance as well as the completion of its acquisition of Data Device Corporation.

TransDigm acknowledges that the DDC acquisition put some new pressure on its balance sheet, adding $1.9 billion in new debt in May. Nevertheless, during the post-report conference call, Howley said that TransDigm still has the capacity to make acquisitions of up to around $1.5 billion without having to issue new stock. A combination of balance sheet cash and capacity under its credit agreement should allow TransDigm to keep pursuing its overall strategy with respect to potential acquisitions, even though the company's projections assume no further purchases during the fiscal year.

In response to the good news, TransDigm shares climbed, rising nearly 3% following the announcement and pushing further into all-time record territory. With the aerospace industry showing no signs of slowing down, TransDigm finds itself in the right place at the right time and is leaving no stone unturned in its efforts to take maximum advantage of favorable current conditions.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.