The stock of TransDigm Group (NYSE:TDG, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $597.41 per share and the market cap of $32.8 billion, TransDigm Group stock gives every indication of being modestly overvalued. GF Value for TransDigm Group is shown in the chart below.
Because TransDigm Group is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 12.2% over the past three years and is estimated to grow 5.96% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. TransDigm Group has a cash-to-debt ratio of 0.20, which is worse than 71% of the companies in Aerospace & Defense industry. The overall financial strength of TransDigm Group is 3 out of 10, which indicates that the financial strength of TransDigm Group is poor. This is the debt and cash of TransDigm Group over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. TransDigm Group has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $4.5 billion and earnings of $2.7 a share. Its operating margin of 30.13% better than 94% of the companies in Aerospace & Defense industry. Overall, GuruFocus ranks TransDigm Group's profitability as strong. This is the revenue and net income of TransDigm Group over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. TransDigm Group's 3-year average revenue growth rate is better than 78% of the companies in Aerospace & Defense industry. TransDigm Group's 3-year average EBITDA growth rate is 7.9%, which ranks in the middle range of the companies in Aerospace & Defense industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, TransDigm Group's ROIC is 8.94 while its WACC came in at 9.05. The historical ROIC vs WACC comparison of TransDigm Group is shown below:
Overall, TransDigm Group (NYSE:TDG, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Aerospace & Defense industry. To learn more about TransDigm Group stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
