TransDigm Group (TDG): A Valuation Analysis to Determine Market Position

Is TransDigm Group (TDG) Worth Its Market Price? An Investigation into Its Fair Value

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TransDigm Group Inc (TDG, Financial) recently showcased a daily gain of 8.7% and a 3-month gain of 12.04%, with an impressive Earnings Per Share (EPS) of $18.77. Investors are now faced with the critical question: is the stock modestly overvalued? To provide a comprehensive answer, we delve into a detailed valuation analysis of TransDigm Group (TDG), inviting readers to explore the insights that follow.

Company Introduction

TransDigm Group Inc (TDG, Financial) is a premier manufacturer and servicer of components and parts for both commercial and military aircraft. With a diverse portfolio organized into three segments—power and control, airframes, and a nonaviation segment catering to off-road vehicles and mining equipment—TransDigm Group operates as an acquisitive holding company. This strategy emphasizes firms with proprietary products enjoying substantial aftermarket demand. Leveraging financial leverage to enhance operating results is a hallmark of their approach. The stock's current price of $973.07, with a market cap of $53.70 billion, stands above the GF Value (Fair Value) of $845.82, suggesting an assessment of the stock's fair value is in order.

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Summarize GF Value

The GF Value is an exclusive metric that calculates the intrinsic value of a stock. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and projections of future business performance. The GF Value Line, depicted on our summary page, suggests a fair value for the stock. A significant deviation from this line may indicate overvaluation or undervaluation, influencing future returns.

TransDigm Group (TDG, Financial) is currently deemed modestly overvalued according to the GF Value. The stock's fair value is meticulously estimated, taking into account historical multiples, internal adjustments based on past business growth, and future business performance forecasts. With a market cap of $53.70 billion at a share price of $973.07, TransDigm Group's valuation requires careful consideration, as its relatively overvalued status could imply a lower long-term return compared to its business growth.

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Financial Strength

Investors must consider a company's financial strength to mitigate the risk of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage can provide insight into financial resilience. TransDigm Group's cash-to-debt ratio of 0.16 ranks lower than 73.81% of peers in the Aerospace & Defense industry, leading to a financial strength rating of 4 out of 10, which is indicative of a weaker financial position.

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Profitability and Growth

Investing in profitable companies, particularly those with long-term profitability, is generally less risky. TransDigm Group has maintained profitability for the past decade. With a 12-month revenue of $6.20 billion and an Earnings Per Share (EPS) of $18.77, the company's operating margin of 43.6% ranks exceptionally well within the industry. Consequently, GuruFocus assigns a profitability rank of 9 out of 10 to TransDigm Group, reflecting robust profitability.

Growth is a pivotal valuation factor, often correlating with a company's stock performance. While TransDigm Group's 3-year average revenue growth rate lags behind 58.87% of industry counterparts, its 3-year average EBITDA growth rate of 3.4% fares better, outranking 54.55% of companies in the Aerospace & Defense industry.

ROIC vs. WACC

Assessing a company's profitability can also be achieved by comparing its Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC). When ROIC exceeds WACC, it suggests that the company is generating value for its shareholders. TransDigm Group's ROIC of 13.87 surpasses its WACC of 9.22, indicating effective capital allocation.

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Conclusion

In summary, TransDigm Group (TDG, Financial) appears modestly overvalued. Despite its strong profitability, the company's financial condition is less robust, and its growth is moderate within its industry. For a more in-depth understanding of TransDigm Group and its stock, interested investors can review its 30-Year Financials here.

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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure