TransDigm: Resilient Growth in Aviation

TransDigm is a dominant force in the global aerospace market, supplying thousands of proprietary, mission-critical components that appear across almost every commercial and military aircraft in service. Through its combination of deeply embedded engineered products, a powerful high-margin aftermarket, and a disciplined acquisition engine, the company has built one of the most compelling business models in the industry. With decades-long product lifecycles, strong pricing power, and a proven ability to transform specialized component businesses, TransDigm continues to generate substantial cash flow and long-term value. The question remains: Does this aerospace powerhouse deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in TransDigm at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of TransDigm, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

TransDigm is a global designer and supplier of highly engineered aerospace components that are essential to the safe and reliable operation of nearly every major commercial and military aircraft in service. Founded in 1993, the company has built its business by acquiring and operating more than 95 specialized component manufacturers, each focused on narrow but defensible niches. Unlike traditional industrial conglomerates, TransDigm operates much more like a focused private-equity platform within the aerospace sector. It acquires proprietary, sole-source component businesses, optimizes their operations, and uses a disciplined capital structure to generate high returns on equity. Its long-standing goal is to deliver private-equity-like returns with the liquidity of a public company. The company generates revenue across three segments. Power & Control provides systems and components that manage fluid flow, electrical power, mechanical motion, and engine functionality. Airframe supplies interior and structural components such as latching systems, security systems, audio equipment, connectors, seals, lavatory parts and safety restraints. Non-Aviation contains a collection of smaller businesses serving ground transportation, industrial, energy and space markets. The business is broadly diversified by platform, customer and market channel, and its products are installed on nearly every commercial and military aircraft currently flying. The defining feature of TransDigm’s model is its focus on proprietary and sole-source products. About 90%t of its net sales come from components it uniquely designs and owns. These are mission-critical parts that must operate reliably under extreme conditions and meet strict regulatory standards. Roughly 75% to 80% of revenue comes from products for which TransDigm is the only approved supplier. Once a component is designed into an aircraft and certified by aviation regulators, switching to an alternative supplier becomes impractical. The cost of re-engineering and re-certifying even a simple part often exceeds the price of the component by orders of magnitude. This gives TransDigm exceptional pricing power and protects its position across decades. A large portion of the company’s economic value comes from the aerospace aftermarket. TransDigm earns most of its EBITDA from replacement parts sold to airlines, maintenance providers and defense operators. Aircraft platforms often remain in production for twenty to thirty years, and the planes themselves typically fly for another twenty-five to thirty years after production ends. This creates product lifecycles that can exceed fifty years. As global flight hours increase, fleets age and maintenance burdens rise, aftermarket consumption grows steadily. Production delays at Boeing and Airbus have also forced airlines to fly older aircraft for longer, further supporting demand for TransDigm’s components. The aftermarket is more profitable and more stable than the original equipment market, and it provides resilience during downturns. TransDigm’s operating structure reinforces its moat. The company uses a decentralized model in which individual operating units have significant autonomy and clear accountability for profitability and cash flow. Corporate headquarters focuses primarily on capital allocation, acquisitions, and incentive systems. This mirrors private-equity governance and keeps decision-making close to the product and customer. TransDigm applies a consistent value-driven methodology across all its businesses: obtain profitable new business where the company’s engineering expertise provides an advantage, continuously improve cost structures, and design products that provide clear value to customers. Acquisitions are central to the company’s long-term strategy. TransDigm targets proprietary aerospace component businesses with strong aftermarket content and clear potential for operational improvement. It integrates them into its decentralized structure and applies its proven playbook. TransDigm’s competitive moat is the result of a combination of structural advantages, including proprietary technology, sole-source positions, long product lifecycles, and a high-margin aftermarket. Its portfolio of proprietary products and sole-source positions limits direct competition and provides enduring pricing power. The mission-critical nature of its components raises switching costs to prohibitive levels. Long platform lifecycles create multi-decade revenue streams, and the high-margin aftermarket provides resilience and consistency across economic cycles.

Management

Michael Lisman serves as the CEO of TransDigm, a position he assumed on October 1, 2025. His appointment followed years of senior leadership within the organization, including serving as Co COO beginning in 2023 and as CFO starting in 2018. This progression gave Michael Lisman deep familiarity with TransDigm’s operating model, its acquisition strategy, and the financial discipline that underpins the company’s private equity style approach to value creation. His background brings together both technical and financial expertise. Trained in aerospace engineering before earning an MBA, Michael Lisman developed the ability to assess businesses with precision while still appreciating the engineering complexity behind the components TransDigm produces. His earlier years in private equity and investment banking helped shape a mindset that prioritizes disciplined analysis, careful capital deployment and a clear view of long term returns. Michael Lisman’s leadership style aligns naturally with TransDigm’s long standing philosophy. He places emphasis on accountability, thoughtful pricing decisions, the strength of the aftermarket and a steady focus on building long term value. During an earnings call he summarized his priorities clearly, noting that the company will operate in a way that creates enduring value for shareholders with whom management is closely aligned. For him, this alignment is an essential part of how TransDigm is structured and how it makes decisions. As CEO, Michael Lisman is expected to continue reinforcing the strategy that has defined TransDigm for decades. He is focused on strengthening the company’s portfolio of proprietary and sole source aerospace components, pursuing acquisitions that meet strict financial and strategic standards and maintaining a capital structure designed to maximize shareholder outcomes. With his combination of technical insight, financial experience and deep familiarity with TransDigm’s culture, Michael Lisman is well positioned to guide the company through its next phase of disciplined growth and long term value creation.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. TransDigm’s ROIC has usually been between 10% and 15% because of the way the company grows. Most of TransDigm’s expansion comes from buying other businesses. When it does this, the total amount of capital tied up in the company becomes large very quickly, while the benefits from those acquisitions show up gradually over many years. TransDigm also uses a significant amount of debt to finance these purchases, which further increases the amount of capital the company has to earn a return on. This combination naturally keeps the ROIC number in the modest but healthy range, even though the company’s underlying economics and cash generation are very strong. In the past two years, ROIC has moved above 15% and reached a record high of 16,9% in fiscal year 2025. The main reason is that profits grew much faster than the capital base. Global flying activity recovered strongly, airlines kept older aircraft in service for longer and delays in new aircraft deliveries increased the need for replacement parts. Since selling parts for in-service aircraft is TransDigm’s most profitable business, earnings rose sharply. At the same time, the acquisitions the company made during this period were substantial but not large enough to offset the strong rise in earnings. In simple terms, profits grew faster than the capital base, allowing ROIC to reach its highest level at 16,9% in fiscal year 2025. Whether ROIC will continue to rise depends on two factors. If aftermarket demand remains strong and flight activity keeps growing, earnings will continue to benefit. However, if TransDigm completes another large acquisition, the capital base will increase again, and ROIC may return toward its usual range. This would not be a sign of weaker performance. It would simply reflect the company’s strategy: TransDigm invests heavily upfront when it acquires a business and then earns the returns gradually over decades. For this reason, the company focuses on long term value creation rather than short term movements in ROIC, and temporary changes in the metric are a normal part of how TransDigm operates.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. TransDigm has reported negative equity every year for the past decade, and the figure reached its most negative level in fiscal year 2025. This is not the result of poor performance, accumulated losses, or weakening fundamentals. Instead, it is a direct outcome of TransDigm’s deliberate financial strategy. The company uses a significant amount of debt to fund acquisitions and return capital to shareholders through large special dividends. When TransDigm pays out these dividends or repurchases debt at a premium, it reduces retained earnings. At the same time, the acquisitions it makes do not immediately add large accounting profits, because the value they create shows up slowly over many years through aftermarket sales. The combination of large cash outflows to shareholders and a balance sheet loaded with acquisition-related assets results in negative equity. Importantly, this is not a sign of financial distress. Negative equity usually raises concern in companies with weak cash flows or deteriorating businesses, but TransDigm is the opposite. The company generates exceptionally stable and predictable aftermarket cash flows, carries pricing power across much of its portfolio, and maintains high margins regardless of the economic cycle. In TransDigm’s case, negative equity simply means that the company has returned more capital to shareholders than it has retained on the balance sheet, while using debt as a tool to amplify long-term returns. This structure is expected to continue as long as TransDigm follows the same strategy. The company intentionally targets a high level of leverage and prefers to return excess cash through special dividends rather than allow equity to accumulate. When leverage temporarily falls below management’s preferred range, TransDigm typically responds with another large special dividend, which pushes equity deeper into negative territory. As long as the company continues to generate strong and steady cash flows from the aftermarket, negative equity is not viewed as a risk but simply as part of how TransDigm optimizes its capital structure. Investors considering TransDigm should understand and be comfortable with this aspect of its financial model. The company is designed to prioritize long-term value creation over short-term balance sheet metrics, and negative equity is an expected pattern rather than a warning sign.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. TransDigm’s free cash flow remains one of the strongest aspects of its business model. Although free cash flow decreased slightly in fiscal year 2025, it still reached its second-highest level in the company’s history. The free cash flow margin also slipped a bit, but this change was modest and largely reflects timing factors rather than a shift in the underlying economics of the business. Aftermarket demand remained very strong, and TransDigm continued to convert a large share of its earnings into cash. Looking ahead, free cash flow is expected to remain robust. Several forces support this outlook. Global flight hours continue to rise, airlines are keeping older aircraft in service longer, and the company benefits from recurring demand for replacement parts. These aftermarket sales carry very high margins and require little ongoing investment, which means they naturally generate significant cash. At the same time, TransDigm continues to improve productivity across its operating units, including through the introduction of automation and efficiency projects that should help maintain strong cash conversion even if growth moderates. Management has also expressed optimism about using new automation tools and early-stage artificial intelligence to keep headcount growth below revenue growth, which helps protect cash flow over time. Capital expenditures are expected to increase slightly, with management guiding to roughly 300 million dollars of spending in fiscal year 2026. About two thirds of this spending is directed toward new business opportunities and projects that increase productivity. These investments often pay for themselves in just a few years. The company is pursuing more than 150 automation initiatives across assembly, machining, polishing and painting, and the cost of these technologies continues to fall. These efforts should help TransDigm maintain its strong cash generation while improving efficiency in both commercial and defense applications. TransDigm’s approach to free cash flow use is consistent and deliberate. The company follows a clear order of priorities. First, it reinvests in its own operations to support new programs, improve productivity and increase long term competitiveness. Second, it uses free cash flow to pursue disciplined acquisitions that fit its model of proprietary, long lived aerospace components with strong aftermarket demand. Third, once reinvestment and acquisitions are accounted for, the company returns excess cash to shareholders through special dividends or share repurchases. The free cash flow yield is currently below its ten year average, which indicates that the shares are trading at a premium relative to their historical valuation. However, we will return to valuation later in the analysis.

Debt

Another important factor to consider is the level of debt. It is crucial to assess whether a business carries a manageable amount of debt, and one simple way to evaluate this is by comparing long term debt to earnings. Using this approach, TransDigm currently sits at 15,99 years of earnings in debt, which is far above the three year benchmark I typically look for. Under normal circumstances, a number this high would be a major red flag. However, TransDigm is not a typical company, and its approach to leverage works very differently than most industrial businesses. TransDigm intentionally maintains a high level of debt because debt is a central part of its business model. The company uses leverage to acquire specialized aerospace component businesses, expand its portfolio of long lived aftermarket revenue streams and return capital to shareholders. This is a deliberate strategy that reflects TransDigm’s private equity–style approach to value creation. Instead of aiming to reduce debt over time, TransDigm uses debt to amplify returns, as long as its cash flows remain strong and stable. Management’s comments in the latest earnings call help explain this mindset. They reiterated that the company’s capital allocation priorities have not changed. First, reinvest in the business. Second, pursue disciplined acquisitions that fit the company’s model. Third, return capital to shareholders through buybacks or special dividends. Paying down debt is considered only after these priorities, and management explicitly noted that large debt reduction is unlikely at this time. At the end of fiscal year 2025, TransDigm had about 2,8 billion dollars in cash, or roughly 2 billion dollars after completing the Simmonds acquisition. Its net debt to EBITDA ratio was 5,8 times, which sits comfortably within management’s preferred range of five to seven times. For investors, the key takeaway is that TransDigm’s high leverage is intentional and built into its strategy. The company’s debt level looks extreme when measured against simple ratios, but it is supported by highly predictable aftermarket cash flows, strong pricing power and a business model designed to withstand economic cycles. The crucial question is not whether TransDigm has a lot of debt, but whether it can comfortably service it. Based on its cash generation, interest coverage and long term visibility, the business remains well positioned to manage this leverage.

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Risks

High leverage is a risk for TransDigm. The company’s debt strategy has supported years of growth and strong shareholder returns, but it also creates vulnerabilities that cannot be ignored. TransDigm deliberately carries a high level of debt, using it to acquire new businesses, expand its portfolio of proprietary aerospace components and return capital to shareholders through special dividends and buybacks. This approach works well when cash flow is strong, but it increases financial pressure if conditions change. The biggest risk is that TransDigm depends on steady cash generation to comfortably service its debt. If the aerospace industry were to experience a sharp downturn, if global flight activity declined or if airlines reduced spending, TransDigm’s cash flow would come under pressure. Because the company has large interest payments to make each year, a meaningful drop in cash flow would limit its flexibility. In a severe scenario, the company might need to slow acquisitions, cut back on investments, sell assets or refinance debt on less favorable terms. Higher interest rates also pose a risk. Although a large portion of TransDigm’s debt is fixed at stable rates through fiscal year 2029, a meaningful portion still fluctuates with market rates. If borrowing costs stay “higher for longer,” interest expenses rise and the company has less cash available for acquisitions or shareholder returns. In fiscal year 2025, TransDigm’s net interest expense increased by more than 20%. Rising interest costs not only reduce free cash flow but also make it harder for new acquisitions to meet the company’s required return thresholds. Carrying so much debt also exposes TransDigm to the possibility of ratings downgrades. If credit agencies lose confidence in the company’s ability to service its debt, borrowing costs could rise and access to financing could become more limited. High leverage also means TransDigm must dedicate a significant portion of its operating cash flow to interest and debt repayment, which reduces the money available for product development, capital expenditures and opportunities to strengthen its competitive position. Competitors with less debt may have more freedom to invest aggressively during downturns.

Pricing pressure is a real risk for TransDigm. The company has historically enjoyed strong pricing power because its components are proprietary, often sole-sourced and deeply embedded in aircraft platforms. This has allowed TransDigm to raise prices gradually over time, especially in the aftermarket where airlines need reliable replacement parts. However, the environment around pricing has started to change, and several forces are beginning to challenge this advantage. One of the biggest shifts comes from aircraft manufacturers. OEMs like Boeing and Airbus are facing pressure from airlines to reduce costs, and they are pushing that pressure down the supply chain. On some newer platforms, such as the Boeing 787, the OEMs have negotiated strict limits on aftermarket pricing. In effect, TransDigm cannot raise prices on those components in the way it historically could. Over time, if these pricing restrictions become more common across new aircraft programs, they could reduce the flexibility TransDigm has relied on to maintain high margins in the aftermarket. Competition is also evolving. While TransDigm still benefits from strong regulatory barriers, competitors such as HEICO continue to develop certified alternative parts known as PMAs. Although these alternatives remain difficult and expensive to produce, they target high-volume or high-value components where customers are most sensitive to cost. In some cases, such as the condensate drain mast for the Boeing 757, PMA competitors have already managed to take a share of the market by offering lower prices. While the overall impact is still limited, these examples show that even niche areas of TransDigm’s portfolio are not completely insulated from competition. Another source of pressure comes from the OEMs themselves taking more control over aftermarket channels. In some cases, OEMs have structured agreements so that they retain a portion of aftermarket revenue or require the supplier to pay royalties on replacement parts. When this happens, TransDigm captures a smaller share of the aftermarket economics, even if unit volumes stay the same. This trend is still more common on the newest aircraft platforms, but it could gradually influence pricing expectations across a broader portion of the industry.

Regulatory risk is a significant challenge for TransDigm because the aerospace industry is one of the most tightly regulated sectors in the world. TransDigm operates under a complex network of rules and oversight from agencies such as the FAA in the United States, the European Union Aviation Safety Agency, and various military authorities. These regulations cover product design, manufacturing standards, testing, certification, and ongoing maintenance requirements. For a company whose entire business depends on the approval and safe performance of its components, any regulatory issue can have immediate and serious consequences. A major source of risk is TransDigm’s reliance on certifications. Every component the company sells must be approved for use on specific aircraft models, whether in commercial aviation or defense. If TransDigm cannot obtain the required certifications on time, or if regulators change their standards, the company may be unable to deliver products or perform repair services. Even small delays can disrupt production schedules, lead to lost sales, or weaken customer relationships. Because many of TransDigm’s components are mission-critical, authorities apply especially strict scrutiny, increasing the risk of setbacks. Investigations and government oversight add another layer of risk. TransDigm has faced criticism in the past over its pricing on defense contracts, leading to investigations by the U.S. Department of Defense and demands for refunds. These situations bring political and public attention, creating the possibility of stricter contract terms, additional reporting requirements, or future limits on profitability in defense programs. Continued scrutiny from lawmakers can also pressure regulators to take a harder line, even if TransDigm is following existing rules. Product quality is another regulatory concern. Because TransDigm’s components are used in aircraft, a failure can have serious consequences, including injury, loss of life, or an aircraft accident. Even the perception of a quality issue can lead regulators to intervene, require inspections, or restrict the use of certain parts. An event linked to one of TransDigm’s products could lead to lawsuits, higher insurance costs, and reduced trust among customers who prioritize safety and reliability.

Reasons to invest

TransDigm’s portfolio of small, under-the-radar aerospace components is a reason to invest in TransDigm. These are not headline-grabbing products like engines, avionics suites, or landing gear systems. Instead, they are the thousands of essential, deeply embedded parts that make modern aircraft function safely and reliably, items such as wire bundle clamps, fluid connectors, ignition components, and hydraulic couplings. While each individual part is inexpensive, often costing only tens of dollars, they are used in such large quantities and are so critical to aircraft operation that they create a powerful and durable source of value. The strength of this portfolio begins with the way these components are designed into aircraft. Even something as simple as a wire bundle clamp, like the well-known Adel Clamp, is selected early in the design process and must pass rigorous testing for vibration, durability, temperature tolerance, and safety. Once approved, that specific clamp is used tens of thousands of times throughout an aircraft. Another example is the Wiggins Connector, a fluid coupling used under aircraft floors. Hundreds of these connectors are required on each aircraft, and they must work flawlessly for decades. These parts are not interchangeable. They become part of the aircraft’s certified design, and removing or replacing them is both costly and operationally risky. This leads to one of TransDigm’s greatest competitive strengths: high switching costs. Because every component must be certified for use on a specific aircraft platform, replacing a TransDigm part with a competitor’s alternative requires expensive requalification testing. What looks like a minor cost savings on a twenty-dollar clamp quickly disappears when the requalification process can run into the millions of dollars. Airlines and OEMs avoid these costs unless absolutely necessary, making it very difficult for competitors to displace TransDigm once its parts are designed in. This dynamic also creates meaningful pricing power for TransDigm. Because its components are often mission-critical and deeply embedded in aircraft systems, the price of the part matters far less to customers than the cost of replacing it. The company’s pricing strategy relies on the value the component provides, not its manufacturing cost. Even something as simple as a seat belt can command a premium in the aftermarket because replacing it with another supplier’s product would require new testing, new approvals, and potential downtime, all of which are far more expensive than the part itself. Another advantage is how widespread these components are. Many of TransDigm’s products appear hundreds or thousands of times across each aircraft, and those aircraft remain in service for twenty-five to thirty years after production ends. With thousands of individual parts aging, wearing, and needing replacement, TransDigm benefits from decades of recurring aftermarket demand. This creates a long-duration revenue stream that is both predictable and highly profitable.

Trends in the aerospace sector is a reason to invest in TransDigm. The industry backdrop has become increasingly favorable, and these developments directly strengthen the long-term economics of TransDigm’s business model. Global air travel has not only recovered but surpassed pre-pandemic levels, and growing at a double-digit rate year over year. More flights mean more takeoffs and landings, and every additional cycle increases wear on aircraft components. Because TransDigm earns most of its profits from supplying replacement parts for in-service aircraft, rising global flight activity directly boosts its high-margin aftermarket business. A major source of this aftermarket strength comes from the age of global fleets. Older aircraft such as the Boeing 737NG, 757, and 767 remain essential to airline operations. Many of these planes are twenty years old or older, and because Boeing and Airbus continue to face production delays, airlines are keeping these aircraft in service longer than expected. Older platforms require more frequent repairs and component replacements, which plays directly into TransDigm’s strengths. Its proprietary components are installed throughout these aircraft, and replacing them with alternatives would require costly requalification. This helps support both consistent demand and healthy pricing. Another favorable trend is the unusually large backlog of new aircraft orders. Airlines across the world continue to order new jets to expand capacity and replace aging fleets. However, OEMs are struggling to increase production fast enough, and recovery in manufacturing rates has been slow and uneven. TransDigm actually benefits from this situation. When new aircraft deliveries are delayed, airlines must continue operating their older planes, which generates more aftermarket consumption. In parallel, improvements in OEM production still contribute to the long-term story by expanding the installed base of aircraft equipped with TransDigm components, each of which will generate aftermarket revenue for decades. Defense spending adds another layer of support. The U.S. government and other nations are investing heavily in military aviation, driven by geopolitical tensions and modernization programs. Military aircraft tend to stay in service for very long periods, and their maintenance cycles remain stable through economic ups and downs. This gives TransDigm a steady source of demand that can help balance any temporary softness in commercial aviation.

Acquisitions is a reason to invest in TransDigm. The company’s ability to consistently identify, acquire, and transform specialized aerospace businesses is one of the most important drivers of its long-term value creation. TransDigm does not pursue acquisitions for size or headline growth. Instead, it targets small and midsize companies that produce mission-critical, highly engineered components, exactly the types of products that fit naturally into its high-margin, aftermarket-driven model. These deals allow TransDigm to expand its portfolio of proprietary components, increase its pricing leverage, and unlock substantial operational improvements over time. One of TransDigm’s key strengths is its disciplined approach. Management evaluates every acquisition with a strict internal return threshold, typically modeling for an internal rate of return of at least 20%. This ensures that only businesses with strong long-term economics, durable demand, and meaningful pricing potential make it into the portfolio. Even in a market where acquisition valuations have risen, TransDigm remains selective, passing on opportunities that do not meet its criteria. This discipline has resulted in a long record of successful deals that consistently enhance margins and contribute to free cash flow growth. A major advantage comes from the types of businesses TransDigm acquires. Many are niche component manufacturers whose products are essential to aircraft safety and performance but underappreciated by larger aerospace companies. These businesses often have strong engineering capabilities but lack structured pricing systems, rigorous cost discipline, or efficient operating models. When TransDigm acquires these companies, it applies its proven value-based pricing methodology, improves cost structures, and optimizes operations. Over time, this approach significantly increases margins, even when the acquired business initially enters the portfolio with relatively low profitability. Another reason acquisitions support the investment case is the steady pipeline of opportunities. The aerospace industry remains fragmented, with many small component manufacturers that match TransDigm’s criteria. Management continues to focus primarily on aerospace and defense components, where it has decades of experience and a deep understanding of product economics. While TransDigm has made selective moves outside traditional aerospace hardware, such as the acquisitions of Calspan and Raptor, the core of its M&A funnel remains firmly within its historical sweet spot. This provides a long runway for continued, repeatable value creation.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 32,06, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 18%, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on TransDigm's historically higher price-to-earnings (P/E) ratio. Our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $961,80. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy TransDigm at a price of $480,90 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.038, and capital expenditures were 222. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a general guideline, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 155 in our calculations. The tax provision was 555. We have 56,35 outstanding shares. Hence, the calculation will be as follows: (2.038 – 155 + 555) / 56,35 x 10 = $432,65 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With TransDigm's free cash flow per share at $32,23 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $508,78.

Conclusion

TransDigm is an intriguing company with strong management and a business model that has created a durable moat built on proprietary technology, sole-source positions, long product lifecycles, and a high-margin aftermarket. The company has historically generated a ROIC between 10% and 15%, a range that is likely to continue even though ROIC briefly rose above 16% in fiscal year 2025. Free cash flow also remained strong, reaching its second highest level ever, and is expected to grow in the coming years. High leverage is a risk because TransDigm depends on consistently strong cash generation to service its large debt load, which makes the company more vulnerable if air traffic weakens, interest rates rise, or the aerospace cycle turns. While this leverage enhances returns in stable conditions, it limits flexibility during downturns. Pricing pressure is another risk, as OEMs and airlines are pushing harder for cost reductions, particularly on newer aircraft programs where pricing limits are becoming more common, while alternative parts from competitors and OEMs retaining more aftermarket economics may gradually erode margins. Regulatory risk also matters, since TransDigm operates in a tightly controlled industry where certifications, compliance, and product reliability are critical; any delays, investigations, or quality issues could disrupt operations and affect long-term performance. On the positive side, TransDigm’s portfolio of small but essential aerospace components remains a compelling advantage, as these parts are deeply embedded in aircraft designs, extremely costly to replace, and required in large quantities over decades, creating high switching costs and reliable aftermarket demand. Favorable trends in the aerospace sector further support the investment case, with global air traffic exceeding pre-pandemic levels, aging aircraft fleets requiring more maintenance, large OEM order backlogs, and steady defense spending all contributing to sustained demand for TransDigm’s components. Acquisitions also strengthen the company’s long-term outlook, as TransDigm consistently identifies and transforms specialized component businesses, improving their pricing and efficiency and generating strong returns while maintaining a disciplined approach that ensures only high-quality targets enter the portfolio. Overall, I believe TransDigm is a great company, and I will be buying shares at my intrinsic value estimate using the Payback Time method at $1.017.

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