TransDigm (TDG) to Report Q4 Earnings: What’s in the Cards?

TransDigm Group Incorporated TDG is scheduled to report fourth-quarter 2017 results before the opening bell on Nov 9.

The company has an excellent earnings surprise history, having beaten estimates in the trailing four quarters, for an average positive surprise of 3%. Last quarter, the company reported earnings of $3.30 per share, reflecting a beat of 5.1%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

TransDigm’s excellent business operation model, which implements value-based operating strategies guided by three value driver concepts, has helped it generate sufficient organic & inorganic growth along with drive operating margin expansion over the past few quarters. The company anticipates business operation model to prove consistently conducive to operating profit and bottom-line growth in the to-be reported quarter as well.

TransDigm designs, produces and supplies highly engineered proprietary aerospace components and certain systems with a significant aftermarket presence. For instance, about 90% of the company’s sales are generated by proprietary engineered products, that is, products for which the company owns the intellectual property. We believe this would enhance the revenue generation capacity through all phases of the aerospace cycle, consequently supplementing its financials.

Of late, the company’s Defense business has also been performing better than expectations adding to its strength. Moreover, a diversified revenue base reduces the company’s dependence on any particular product, platform or market channel and will continue to play a significant role in maintaining financial performance in the upcoming quarters.

However, TransDigm is plagued with negative trends of late, like weaker defense aftermarket orders and soft business jet, helicopter and freighter revenues. This is likely to strain its top-line growth in the fiscal fourth-quarter results.

This apart, in recent times the company’s commercial transportation business is suffering from inventory management issues from OEM customers, much of which appears due to rate reductions on wide-body platforms. Further, softness in this market can be traced to a decline in various fleet refurbishment projects. The refurbishment orders are getting rescheduled or delayed, which in turn may also dampen the fourth-quarter results.

Further, the company’s interest expenses have been trending upward for the last few quarters. In fact, the company anticipates its debt servicing costs to rise almost 24% year over year to around $600 million in fiscal 2017. Thus, we believe that rising interest expenses will continue to pressure the company’s profits, going forward.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for TransDigm this time around. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is +0.33% as the Most Accurate estimate of $3.39 is pegged higher than the Zacks Consensus Estimate of $3.38. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: TransDigm has a Zacks Rank #4 (Sell), which makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Adobe Systems Incorporated ADBE has an Earnings ESP of +0.25 % and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alcoa Corp. AA has an Earnings ESP of +5.75% and a Zacks Rank #2.

Axcelis Technologies, Inc. ACLS has an Earnings ESP of +19.39% and a Zacks Rank #2.

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