TransDigm Group rated Outperform in new coverage by BMO Capital

[Man examining the underside of a plane]
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BMO Capital Markets late Monday initiated coverage of TransDigm Group (NYSE:TDG [https://seekingalpha.com/symbol/TDG]) with an Outperform rating, arguing that the aerospace supplier remains well-positioned for long-term growth despite a recent decline in its stock price.

“Risk is to the upside following the stock’s pullback and we see several levers of growth not considered in our base case,” wrote BMO research analyst Michael Goldie in a September 29 note to clients.

PROPRIETARY COMPONENTS AND AFTERMARKET STRENGTH

TransDigm (NYSE:TDG [https://seekingalpha.com/symbol/TDG]), which designs and manufactures highly engineered aircraft components, operates across commercial OEM, commercial aftermarket and defense markets. Goldie noted that the company’s model is underpinned by proprietary parts where it controls intellectual property and generates significant aftermarket revenue.

“Management follows a value-based pricing strategy, which combined with continuous productivity improvement, has led to strong margins and free cash flow,” he said. Since its IPO in 2006, TransDigm (TDG [https://seekingalpha.com/symbol/TDG]) has delivered compounded annual shareholder returns of 29%, including 25% over the past decade and 26% in the last five years.

CAPITAL ALLOCATION STRATEGY

Goldie said the company’s disciplined approach to capital deployment, where mergers and acquisitions have historically accounted for about half of earnings before interest, taxes, depreciation and amortization growth.

“After reinvestment, management’s first choice for deployment is M&A… followed by special dividends, and then buybacks,” he wrote.

The company has amplified its returns by using leverage, targeting net debt to ebitda in the range of five to seven times.

VALUATION RESET CREATES OPPORTUNITY

Shares of TransDigm (TDG [https://seekingalpha.com/symbol/TDG]) have fallen 20% since July, a drop Goldie attributed to slower aftermarket growth and a more measured pace of acquisitions. Still, he argued that the pullback has created an attractive entry point.

“The stock has sufficiently reset and is aligned to slightly undervalued versus peers on several screens including ROIC, free cash flow and earnings,” he said.

While not central to his base case, Goldie suggested that a large-scale acquisition could act as a catalyst for re-rating the stock. In the meantime, he pointed to robust shareholder distributions as a source of value, highlighting the company’s $9.5 billion special dividend this year, equivalent to about 12% of its market capitalization.

“Patient investors can collect healthy distributions, all while price and productivity gains drive margin expansion,” Goldie wrote.

MORE ON TRANSDIGM GROUP

* TransDigm: More Debt And A Special Dividend [https://seekingalpha.com/article/4817247-transdigm-more-debt-and-special-dividend]
* TransDigm: Buy The Dip On Disappointing Earnings [https://seekingalpha.com/article/4809321-transdigm-buy-dip-on-disappointing-earnings]
* TransDigm Group Incorporated (TDG) Q3 2025 Earnings Call Transcript [https://seekingalpha.com/article/4808976-transdigm-group-incorporated-tdg-q3-2025-earnings-call-transcript]
* TransDigm downgraded at RBC Capital, citing slower growth, limited M&A [https://seekingalpha.com/news/4493117-transdigm-downgraded-at-rbc-capital-citing-slower-growth-limited-m-and-a]
* Top industrial gainers and losers: General Electric logs biggest weekly gain while CSX lags [https://seekingalpha.com/news/4490788-top-industrial-gainers-and-losers-general-electric-logs-biggest-weekly-gain-while-csx-lags]