The Outlook for TDG Stock
Dear reader, I have a mixed bag of news on TransDigm Group Incorporated (NYSE:TDG). The good news is that TDG stock has officially entered our Hall of Fame as an outperforming stock. The bad news is that it may be out of gas.
Don’t get me wrong. I’m still a big fan of TDG stock. Rather than building flashy apps that other companies can imitate, TransDigm builds parts for aircraft manufacturers. It is a lucrative business that is protected by the fact they own patents for 90% of the parts they sell. That’s how management has kept sales and profits growing so fast.
In its most recent quarter, TransDigm sold $797.69 million worth of parts, up 15.4% from the same quarter last year. At the same time, the cost of making those parts only rose 6.7%, meaning that TransDigm was reaching economies of scale. Its per-unit of production was falling, meaning that profit margins exploded. The company delivered net income of $140.6 million. It was a 42% year-over-year increase. (Source: “Form 10-Q,” Securities & Exchange Commission, August 10, 2016.)
Part of the company’s success is due to its exclusivity. In most cases, TransDigm is the only company that can deliver the parts needed for building the aircraft. It is an enviable position for any business, but that doesn’t mean you hold the stock forever.
Investing isn’t about attachment. It’s about spotting a stock that’s underpriced and riding the gains until the market balances. Once the stock is trading at a fair price, it’s best to exit the position. Either the stock’s trajectory will plateau, or worse still, it plummets under market pessimism. That’s the position we’ve reached with TDG stock.
I’m also a little worried at the level of insider trading. According to a recent filing with the Securities and Exchange Commission, TransDigm CEO W. Nicholas Howley recently sold 100,000 shares of his TDG stock, which was 79% of his stake in the company. At a share price of $265.42, the total sale adds up to roughly $26.5 million, leaving Howley with only $7.1 million of TDG stock. (Source: “TransDigm Group Incorporated Tr (NYSE:TDG) Trading Down – Insider Trading Activity,” Finance Daily, August 31, 2016.)
That’s not a good sign. Once again, it doesn’t mean that TransDigm-the-company is in danger, but it could mean that TansDigm-the-stock has reached a ceiling.
Instead of looking at this mature stock, we should pay more attention to companies that have unlimited upside. For instance, our team of expert analysts have compiled a list of low-priced tech stocks that could surge. Click here to read more.