TransDigm (TDG)

Aerospace and defense company TransDigm (NYSE:TDG) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 12% year on year to $2.15 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $8.85 billion at the midpoint. Its non-GAAP profit of $9.11 per share was 1.8% above analysts’ consensus estimates.

Company Overview

Supplying parts for nearly all aircraft currently in service, TransDigm (NYSE:TDG) develops and manufactures components and systems for military and commercial aviation.

Aerospace companies often possess technical expertise and have made significant capital investments to produce complex products. It is an industry where innovation is important, and lately, emissions and automation are in focus, so companies that boast advances in these areas can take market share. On the other hand, demand for aerospace products can ebb and flow with economic cycles and geopolitical tensions, which can be particularly painful for companies with high fixed costs.

TransDigm’s peers and competitors include Raytheon (NYSE:RTX), L3Harris Technologies (NYSE:LHX), and Moog Inc. (NYSE:MOG.A).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, TransDigm’s sales grew at a mediocre 7% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about TransDigm.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. TransDigm’s annualized revenue growth of 19.3% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

TransDigm also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, TransDigm’s organic revenue averaged 14.9% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, TransDigm’s revenue grew by 12% year on year to $2.15 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 10% over the next 12 months, a deceleration versus the last two years. Still, this projection is healthy and implies the market sees success for its products and services.

TransDigm has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 41.6%.

Looking at the trend in its profitability, TransDigm’s operating margin rose by 16.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, TransDigm generated an operating profit margin of 46.1%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

TransDigm’s EPS grew at an astounding 18.2% compounded annual growth rate over the last five years, higher than its 7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into TransDigm’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, TransDigm’s operating margin was flat this quarter but expanded by 16.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For TransDigm, its two-year annual EPS growth of 33% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, TransDigm reported EPS at $9.11, up from $7.99 in the same quarter last year. This print beat analysts’ estimates by 1.8%. Over the next 12 months, Wall Street expects TransDigm’s full-year EPS of $35.77 to grow 12.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

TransDigm has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 20.8% over the last five years.

Taking a step back, we can see that TransDigm’s margin expanded by 4.6 percentage points during that time. This is encouraging because it gives the company more optionality.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

TransDigm’s five-year average ROIC was 16.4%, beating other industrials companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, TransDigm’s ROIC has increased. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

TransDigm’s $25.05 billion of debt exceeds the $2.43 billion of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $4.46 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. TransDigm could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope TransDigm can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Revenue missed by a small amount, but TransDigm managed to narrowly top analysts’ EBITDA and adjusted EPS expectations this quarter due to better profitability. Looking ahead, the company reaffirmed previously-provided revenue and adjusted EPS guidance. Overall, this was a fine quarter but may not feature enough clear positives for the market. The stock remained flat at $1,465 immediately following the results.

Updated: July 9, 2025 at 10:51 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in TransDigm.

TransDigm is one of the best industrials companies out there. Although its revenue growth was mediocre over the last five years, its growth over the next 12 months is expected to be higher. Plus, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, and its impressive operating margins show it has a highly efficient business model.

TransDigm’s P/E ratio based on the next 12 months is 38x. Looking across the spectrum of industrials businesses, TransDigm’s fundamentals clearly illustrate it’s a special business. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $1,584 on the company (compared to the current share price of $1,526), implying they see 3.7% upside in buying TransDigm in the short term.