TransDigm Overcomes Aftermarket Sales Slowdown In Q2

Despite a slowdown in its core commercial aftermarket sales, TransDigm (TDG) still managed to exceed Wall Street’s expectations for its fiscal 2024 second-quarter (Q2) earnings.

The Ohio-based company recorded $1.92 billion in revenue, up 21% year-on-year and ahead of a consensus estimate of $1.88 billion, and posted adjusted earnings per share of $7.99, compared to analysts’ expectations of $7.42.

In Q2, TransDigm “saw a healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM [original equipment manufacturing], commercial aftermarket and defense,” said CEO Kevin Stein in an earnings call. However, he noted “OEM aircraft production rates remain well below pre-pandemic levels” and TDG’s “results to continue to be adversely affected.”

“The one blemish in TDG’s print was its 8% core commercial aftermarket sales growth relative to the 16% average growth we have seen from peers,” Robert Spingarn of Melius Research says in a May 7 note to clients. Because the aftermarket accounts for about 75% of TDG’s earnings before interest, tax, depreciation and amortization (EBITDA), even a modest slowdown in sales raises eyebrows among analysts and investors.

That said, Spingarn noted the aftermarket is shorter-cycle relative to commercial OEM “and sales can be lumpy in any given quarter. So, we wouldn’t read too much into any single quarter,” he said.

In the view of JPMorgan Chase, TDG’s strong defense sales—21% growth that was nine points ahead of its expectation—offset the aftermarket slowdown. “Aftermarket weakness came from freight and especially the bizjet/helicopter market,” the investment bank says in a May 7 note to clients.

JPMorgan is bullish on the potential of military MRO work for TDG, noting the company’s strong adjusted EBITDA margin rate “despite a significant aftermarket miss.” The investment banksays “defense aftermarket work is probably about as profitable” as the commercial segment.

Looking ahead, TDG will likely be considering mergers and acquisition (M&A) target, but the company’s management declined to offer many specifics when pressed by a Deutsche Bank analyst during the earnings call. Stein expressed optimism about M&A opportunities, especially small and medium-size companies, saying “it’s the busiest we’ve probably ever been” when it comes to acquiring companies.

However, he adds “it’s difficult for me to unpack it into quarterly buckets,” while TDG remains “very picky in the businesses that we choose and we will continue to do that.”