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James Li
James Li
Articles (893)  | Author's Website |

3 Undervalued-Predictable Aerospace Companies to Consider as Trade Talks Materialize

Aerospace and defense stocks gain on US and China trade deal hopes

December 12, 2018 | About:

According to the undervalued predictable screener, three undervalued-predictable aerospace and defense companies are TransDigm Group Inc. (NYSE:TDG), Heico Inc. (NYSE:HEI.A)(NYSE:HEI) and Hexcel Corp. (NYSE:HXL).

Dow soars on progress on smoothing U.S.-China trade relations

The Dow Jones Industrial Average closed around 24,527.27, up 157.03 points or 0.64% higher than its previous close of 24,370.24. Major aerospace and defense companies like Boeing Co. (NYSE:BA) and Bill Ackman (Trades, Portfolio) target United Technologies Corp. (NYSE:UTX) increased more than 1% on news that China is “working to increase access to foreign companies,” according to a Wall Street Journal report.


Gurus riding Boeing’s momentum include the T Rowe Price Equity Income Fund (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

TransDigm Group

Cleveland-based TransDigm Group designs, produces and supplies engineered aircraft components for use in commercial and military aircraft. Shares closed around $353.36, up approximately 2.26% from the previous close of $345.73. While the company trades above its Peter Lynch earnings line, TransDigm trades slightly below its median price-earnings valuation according to the company’s extended Peter Lynch chart. Additionally, TransDigm has a 16% margin of safety based on its DCF earnings calculation.


TransDigm CEO Kevin Stein said on Nov. 6 the company’s strong commercial aftermarket and defense revenues contributed to a full-year EBITDA margin of 49%. GuruFocus ranks the company’s profitability 9 out of 10 on several positive indicators, which include expanding profit margins, consistent revenue growth and a strong Piotroski F-score of 7. The company’s business predictability ranks a perfect five stars on strong and consistent revenue and earnings growth over the past 10 years.


Despite strong profitability, TransDigm’s financial strength ranks a poor 4 out of 10, primarily due to weak interest coverage of 2.48 and an Altman Z-score of 1.55. The former falls below Benjamin Graham’s safe threshold of 5 while the latter suggests possible financial distress.


Gurus riding TransDigm’s profitability potential include Steve Mandel (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).


Florida-based Heico manufactures jet engines and aircraft components for the aviation and defense industries. Class A shares (NYSE:HEI.A) closed around $68.35, up approximately 2.74% from the previous close of $66.52. Likewise, standard shares (NYSE:HEI) closed around $83.28, up approximately 2.10% from than the previous close of $81.54.


GuruFocus ranks Heico’s profitability 9 out of 10 on several positive investing signs, which include expanding profit margins and a three-year revenue growth rate that outperforms 89% of global competitors. Additionally, Heico has a business predictability rank of 4.5 stars and a 9.75% return on assets, close to a 10-year high.


Despite increasing long-term debt, Heico’s financial strength ranks a solid 7 out of 10: interest coverage of 19.83 ranks higher than 62% of global competitors while the Altman Z-score is a robust 6.55.


Chuck Royce (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio), two of three gurus speaking at next year’s value conference, both own shares of Heico.


Stamford, Connecticut-based Hexcel develops and manufactures carbon fibers, reinforcements, honeycomb and adhesives for use in commercial aerospace, space and defense markets. Shares closed around $59.48, up 2.30% from the previous close of $58.13. Based on its extended Peter Lynch chart, Hexcel is trading slightly below its median price-earnings valuation but higher than its Peter Lynch earnings line. Despite this, the company’s price-earnings ratio is near a two-year low of 17.66 while the company’s price-sales ratio is near a two-year low of 2.36.


GuruFocus ranks Hexcel’s profitability 8 out of 10: among the company’s six positive investing signs are expanding profit margins, consistent revenue growth and a dividend yield near a five-year high. The company’s net profit margin of 13.95% is near a 10-year high and outperforms 88% of global competitors.


Gurus riding Hexcel’s momentum include Robert Karr (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).

Disclosure: No positions.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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