Insights

Why TransDigm Shares Flew Higher in July

What happened

Airline earnings season proved to be a mixed bag for the sector, with CEOs forecasting continued strong demand at least somewhat offset by soaring costs. Though the forecast failed to inspire airline investors, it was good news for some of the industry’s top suppliers. Shares of one such company, TransDigm Group (NYSE: TDG), finished the month up 16%, according to data provided by S&P Global Market Intelligence, despite the company making very little news during the month.

So what

TransDigm is a manufacturer of a wide range of parts and subsystems for the commercial aerospace and defense business. The company is involved in a variety of different businesses and a lot of new plane platforms, but more than 75% of its earnings comes from the commercial aftermarket, or spare parts, business.

The company has been a great long-term performer, with the shares up more than 400% over the past decade, but that share-price appreciation has slowed since the pandemic. A slowdown in travel has led to less demand from airlines for spare parts, limiting TransDigm’s profits.

The airlines haven’t fully recovered from the pandemic, and coming into earnings season some had feared that demand might soften in the months to come due to high inflation and the risk of a recession. But the industry by and large said that, although higher costs are eating into profitability, demand remains strong, and early bookings heading into the fall are solid.

For TransDigm, that means airlines aren’t likely to make additional cuts beyond what they have already announced, and demand for spare parts is likely to remain strong in the months to come. Coming into July, TransDigm shares were down about 15% year to date on recession fears, and the airline commentary on strong demand has helped ease some of the concerns lingering over the stock.

Now what

This still is not a great market for TransDigm. Airlines are feeling the pinch, and continued supply chain pressures and component inflation threaten to crimp margins. TransDigm has a flexible business model and a lot of power to trim costs as needed, but this is not the sort of environment where TranDigm is likely to outperform.

We’ll learn more on Aug. 9 when TransDigm releases its fiscal third-quarter results, but for now the most likely path from here is for the stock to slowly grind higher as long as aviation demand holds strong, with a lot of potential upside if inflation is kept under control and airlines are able to accelerate growth.

Lou Whiteman has positions in TransDigm Group. The Motley Fool recommends TransDigm Group. The Motley Fool has a disclosure policy.

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