TransDigm Group

Mechanics of the moat. TransDigm’s products are heavily engineered, certified components embedded on nearly every major platform; once spec’d into the type certificate, airlines and depots overwhelmingly buy the same part for decades due to airworthiness, paperwork, and reliability concerns.

Management estimates about 90% of sales are from proprietary products and about 55% of sales from the aftermarket, where certification and documentation requirements, not just unit price, drive purchasing decisions. Product life cycles can exceed 50 years when you include the aftermarket tail. Component scoring and weightings.

Switching costs and certifications 40% weight: 95/100, given FAA/EASA approvals and platform qualification. Intangible assets and proprietary IP 30%: 90/100, reinforced by design authority and data rights. Efficient scale 20%: 85/100, as many niches are too small to attract scaled entrants.

Cost advantage 10%: 70/100, not classic low‑cost but advantaged through mix, engineering, and small‑lot manufacturing expertise. Network effects 0%: 10/100, not material. Weighted average ≈ 89/100. Erosion risks to monitor.

Parts Manufacturer Approval competitors like HEICO can pressure select lines, especially high‑volume consumables, and OEMs occasionally attempt second‑sourcing. Management reports limited aggregate impact so far, but we track PMA penetration and OEM destocking attempts.

Persistent DoD pricing scrutiny can also catalyze changes in contracting that partially blunt pricing. Overall moat durability remains high given thousands of SKUs, diversified platforms, regulatory barriers, and the scale of the installed base.

Evidence of pricing power. EBITDA As Defined margins consistently sit in the low to mid‑50s and expanded again in Q3 FY2025 to 54.4% despite mixed OEM demand, reflecting the company’s ability to price for value on critical, sole‑source parts.

Management’s language emphasizes pricing that fairly reflects delivered value and required resources, and the aftermarket/oem mix naturally supports inelastic demand. Latent and sustainability assessment.

Given the mission‑critical nature of the parts and their small cost relative to total aircraft economics, we believe TransDigm could continue to take measured price above inflation over time, especially in aftermarket channels.

Offsets include periodic DoD or political pressure on defense pricing and occasional PMA substitution on specific lines, which we underwrite by dialing back our long‑term price‑mix uplift in defense and certain high‑volume consumables.

Drivers of predictability. The installed base model creates a tollbooth on flight hours, with aftermarket representing about 55% of sales and many parts consumed or overhauled on fixed intervals. Product lives and platform production often span multiple decades, smoothing volatility over time.

Defense provides an additional ballast and diversified end‑market exposure. Sources of variability. Cycles and exogenous factors can still impact results. In Q3 FY2025 management highlighted OEM build‑rate headwinds and inventory destocking, while commercial aftermarket growth moderated from post‑pandemic peaks.

We view these as timing effects rather than structural issues, but they underscore why we prefer to anchor on aftermarket cash generation rather than OEM unit volumes.

Balance sheet and liquidity. As of Q3 FY2025, TransDigm reported about 2.8 billion dollars of cash and roughly 25.0 billion dollars of gross debt, implying about 22 billion dollars of net debt and net leverage of ~4.9x EBITDA As Defined.

Subsequent to quarter‑end, the company raised 5.0 billion dollars of new debt and paid a 90 dollar per share special dividend in September 2025, which will lift pro‑forma leverage. Debt maturities are well‑termed with no tranche due until November 2027, and interest is partly fixed/hedged.

The structure is deliberate and historically sustainable, but it is a real risk factor in a stress scenario. Cash generation and coverage. Using standard cash flow, TTM CFO is about 2.10 billion dollars and capex about 0.20 billion dollars, for about 1.91 billion dollars of FCF supporting interest and opportunistic buybacks.

We also note management’s “free cash flow” definition differs from standard FCF and includes adjustments such as cash interest and taxes; our valuation relies on the standard measure from GAAP cash flow statements.

Playbook and discipline. TransDigm’s capital allocation mirrors a focused private‑equity approach: acquire proprietary, high‑aftermarket businesses, drive operational improvement, and routinely return capital via large special dividends when leverage and opportunity allow.

In the past 18 months it acquired CPI’s Electron Device Business, SEI Industries, FPT Industries, Raptor Scientific, closed Servotronics in July 2025, and struck a deal for Simmonds Precision Products from RTX, while paying a 75 dollar special dividend in October 2024 and a 90 dollar special dividend in September 2025. YTD FY2025 it also repurchased roughly 0.5 billion dollars of stock.

Assessment. The track record of value creation is excellent, but the model explicitly tolerates higher leverage and occasional political scrutiny, so we require a valuation cushion. SBC exists but is not egregious relative to cash generation, and buybacks have been sized within free cash capacity.

Continuity and incentives. Founder‑chair W. Nicholas Howley continues to anchor the culture and operating method. A planned CEO transition is underway: Kevin Stein retired as CEO effective September 30, 2025 and long‑time operator and former CFO Mike Lisman succeeded him, which we view as continuity of the playbook.

Governance is seasoned and deeply familiar with the acquisition and pricing disciplines that define the franchise.