I don’t often say this, but I’m delighted that one of my favorite defense stocks is down nearly 9% today. In this increasingly challenging investing environment, this represents a rare buying opportunity.
The stock I’m referring to is TransDigm Group Inc. (TDG), which boasts some of the highest margins in the aerospace and defense industry. Its operating margin of 41% is massively higher than its competitors: Honeywell (HON) and United Technologies (UTX) have margins of 18% and 15% respectively.
This is because TransDigm derives 90% of its sales from proprietary products, and the company is the sole source provider for nearly 75% of its sales. So it has cornered the market on many kinds of aircraft components, from door security systems to specialized pumps to ignition systems.
For fiscal 2016, analysts are calling for 17.4% annual sales growth and 26.4% earnings growth. This is in an industry that’s plagued with anemic sales growth and single-digit earnings growth. So it’s easy to see why TDG shares have been on a tear lately, having jumped nearly 20% over the past 12 months.
For those of you who haven’t bought TDG yet, today is your chance; allow me to explain.
TDG previously declared a special cash dividend of $24 per share. This was big news because TDG doesn’t typically pay a dividend. Shareholders of record will receive the special dividend on November 1. The ex-dividend date is October 20 [today], so those who held shares at the close of business on October 19 qualify for the dividend. In other words, the reason that TDG shares are down 8% today is that yesterday was the cutoff.
Even if you didn’t get a chance to buy shares before yesterday, I consider today’s pullback a fantastic buying opportunity. TransDigm is scheduled to report fiscal fourth-quarter results on November 14, and I expect the stock to move higher after this report. Analysts expect TransDigm to post 8.7% annual sales growth and 12.7% earnings growth this earnings season. However, TransDigm has a strong track record of earnings surprises, and I expect a repeat performance here.
For these reasons and more, I consider TDG a B-rated Buy in Portfolio Grader. I also currently recommend TDG in my Blue Chip Growth newsletter; current subscribers can view my Buy Below price here.