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On Monday, UBS analyst Gavin Parsons (NYSE:PSN) upgraded TransDigm stock, listed on the New York Stock Exchange (NYSE:TDG), from Neutral to Buy, setting a new price target of $1,595, up from the previous $1,502. Currently trading at $1,290, with analyst targets ranging from $1,250 to $1,627, InvestingPro analysis suggests the stock is currently trading above its Fair Value. Parsons cited several factors behind the optimistic outlook for the aerospace components manufacturer.
The upgrade is based on expectations that aftermarket growth will stabilize and pick up pace starting from the first fiscal quarter. Parsons anticipates this growth to be in the range of 10-11%, which surpasses market expectations that forecast a further slowdown to high single-digit growth. The analyst’s confidence is bolstered by the fact that freight flights have seen a 10% increase over the last six months.
In addition to aftermarket growth, UBS projects significant margin expansion for TransDigm. The firm estimates that EBITDA margins will improve by 100 basis points annually, compared to the consensus of a 40-60 basis point increase. This forecast remains conservative when juxtaposed with TransDigm’s historical average of 160 basis points per year in core margin expansion.
The financial position of TransDigm also plays a role in the upgraded rating. With net leverage currently at 5 times, against the company’s target range of 5-7 times, there is considerable ’dry powder’ for potential capital deployment. UBS predicts that by the end of the year, TransDigm could have around $12 billion in dry powder, which could escalate to $24 billion by FY27E.
Parsons’ analysis suggests that TransDigm is positioned for robust growth and financial flexibility, which could lead to a step-up in capital deployment activities. The company’s stock rating upgrade and the raised price target reflect UBS’s positive outlook on the company’s future performance.
In other recent news, TransDigm Group Inc reported its first-quarter earnings, which exceeded analyst expectations, with adjusted earnings per share at $7.83, surpassing the consensus of $7.64. However, the company’s revenue of $2.01 billion slightly missed the estimates of $2.02 billion, representing a 12.1% increase year-over-year. TransDigm’s EBITDA As Defined rose 16.3% to $1.06 billion, with margins improving to 52.9% from 51.0% the previous year. The company reaffirmed its revenue guidance for fiscal 2025, projecting between $8.75 billion and $8.95 billion, aligning with analyst expectations. Additionally, TransDigm adjusted its earnings per share outlook for the year to a range of $35.51 to $37.43, slightly increasing from the previous forecast. The company repurchased 252,800 shares during the quarter, spending approximately $316 million. TransDigm maintained its market growth assumptions, anticipating mid-single digit growth in commercial OEM revenue and high-single to low-double digit growth in commercial aftermarket revenue for fiscal 2025. Defense revenue growth is expected to be in the high-single digit range.
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