Well, the results are in and it’s official: Donald Trump has defied all conventional wisdom and won the presidential election. While it will take a while to sort out what that means for most of the market, it’s certainly clear that the defense sector is going to get a boost. And Transdigm Group Incorporated (NYSE:TDG) is going to be one of those big winners.
No, TDG stock isn’t a big name defense contractor, it’s more a big name defense and commercial aerospace subcontractor. Through its 34 companies it supplies everything from hoses, to winches to cockpit security systems, to fuel, hydraulic and lubrication pumps.
This may not be sexy, but these are essential parts on machines that have to be as close to “5 9s” (99.999%) reliable as you can get. And all parts have very strict regulations and approval processes. When you have established that reputation for quality and performance, pretty much everyone beats a path to your door.
The Story Behind TDG Stock’s Impressive Strength
The barriers to entry into this space are very high. Plus, it has numerous complementary companies that help make TransDigm a one-stop shop when contractors are looking to ‘sub’ out the interior controls and mechanics. It also means that the prime contractor doesn’t have to chase down various subcontractors and manage them. TDG can provide a number of services and make the production process more efficient.
That is TransDigm’s most powerful strategic moat. Because each small part dominates its particular industry, it means TDG is practically a monopoly as the sum of its parts.
The other thing that is striking about this business is that given the long lifetime of a plane like a Airbus A320, that means TransDigm has to build parts for a plane for 30 years. It is also highly likely the aircraft owners will buy replacement parts from the original equipment manufacturer.
And while there is plenty of defense work on the books — the new B-21 Raider long-range bomber, new versions of the F-22 and F-35 as well as a booming helicopter market — that order book is likely to get even busier.
Add to that the fact that as the middle class continues to grow in Asia, travel has also expanded. And much of that travel is by air, which means commercial aircraft are in increasingly high demand.
Of its competitors, TDG is one of the smaller ones in that pond. But its niche markets keep it growing since its competitors are too big to be as nimble as TransDigm.
The company is expected to report Q4 earnings on Nov. 14. Its Q3 earnings surprised to the upside, although revenue fell below expectations. But that is likely to change in coming quarters and we can use the lull to stock up on TDG stock.
Also of note, each year it offers a special cash dividend for shareholders; this year it announced a $24 dividend, or about a 9% yield. That is also a very nice bonus.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.