Can TransDigm (TDG) Pull Off A Surprise In Q4 Earnings?
Zacks Investment Research | Nov 10, 2016 08:40PM ET
TransDigm Group Incorporated (NYSE:TDG) is slated to report fourth-quarter fiscal 2016 results, before the opening bell on Nov 14.
TransDigm has a decent earnings surprise history. The company beat estimates thrice over the trailing four quarters with an average positive surprise of 12.3%. Last quarter, the company had posted a positive earnings surprise of 5%.
Let's see how things are shaping up for this announcement.
Factors to Consider
TransDigm designs, produces and supplies highly engineered proprietary aerospace components and certain systems/subsystems. In fact, about 90% of its sales are generated by proprietary products, that is, products for which the company owns the intellectual property. This translates into consistent and sustained revenue generation capacity through all phases of the aerospace cycle. We believe that the company’s fiscal fourth-quarter results will benefit from its robust proprietary sales.
Also, we believe that stable aftermarkets, which have historically produced higher gross margins, will be one of the major profit churners this earnings season. TransDigm is also enjoying robust momentum in commercial aftermarket sales, which should be reflected in the upcoming results as well. The company’s commercial transport industry has also been gaining traction over the past few months, which is expected to boost the upcoming quarterly results.
This apart, the company has been consistently strengthening its highly-engineered proprietary aerospace business with strategic acquisitions. During third-quarter fiscal 2016, TransDigm had posted a 15.4% year-over-year increase in the top line, as its accretive acquisitions contributed to sales and organic revenue growth. In this regard, we believe that the recently completed buyouts of ILC Holdings Inc. and Breeze-Eastern Corporation are likely to bolster sales of proprietary aerospace components, thereby supplementing top-line performance during the about-to-be-reported quarter.
TransDigm’s acquired businesses will likely continue being strong growth drivers in the coming times. Further, the company’s efforts to streamline costs will likely translate into strong margin expansion in the quarters ahead.
Despite these positives, the company’s financials have been hurt by weak revenues from business jets and helicopters. This will likely dampen the fiscal fourth-quarter results. Moreover, softness in global macroeconomic conditions is impacting air travel, adding to the company’s woes. Also, reduction in number of flight hours of customers can thwart the company’s growth momentum.
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