Can TransDigm (TDG) Maintain Its Earnings Streak In Q3?

TransDigm Group Incorporated (NYSE:TDG) is slated to report third-quarter fiscal 2017 results before the opening bell on May 9.

The company has an excellent earnings surprise history, with an average positive surprise of 3.7% for the trailing four quarters. TransDigm scored its fifth consecutive earnings beat in the last reported quarter, beating estimates by 1.0%.

We expect the company to score an earnings beat in the about-to-be-reported quarter.

Why a Likely Positive Surprise?

Our proven model shows an earnings beat for TransDigm as it possesses the key components.

Zacks ESP: Earnings ESP for TransDigm is +1.01% as the Most Accurate estimate is pegged at $3.01, higher than the Zacks Consensus Estimate of $2.98. A positive Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: TransDigm holds a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) has a significantly higher chance of beating earnings estimates.

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

The favorable combination of TransDigm’s Zacks Rank #2 and +1.01% ESP makes us reasonably confident of a positive earnings beat.

Growth Factors to Consider

TransDigm’s fiscal third-quarter top line is likely to benefit from its thriving commercial aftermarket business. It boasts higher margins and comprises only 55% of sales, but makes up over 75% of EBITDA. This translates into consistent revenue generation capacity through all phases of the aerospace cycle.

This market is expanding as the majority of aircraft bought during the financial crisis is beginning to age, and requires more frequent and comprehensive servicing. In addition, strategic acquisitions made over the past few years are likely to supplement TransDigm’s sales for the quarter under review. During the quarter, the company acquired three add-on aerospace product lines for roughly $100 million. The product lines mainly comprise proprietary, sole-source products with significant aftermarket content.

These acquisitions are expected to boost aftermarket sales further. As a matter of fact, during 2016, TransDigm acquired numerous businesses, including DDC, Breeze-Eastern and Young & Franklin/Tactair. During the fiscal second quarter, the company’s top line rose an impressive 9.6% year over year, as its accretive acquisitions contributed $70 million to sales.

This apart, TransDigm’s business operation model, which implements value-based operating strategies, is quite well proven and is likely to boost margins. Encouragingly, this overarching business model has helped the company strengthen its foothold in highly-engineered proprietary aerospace components’ niche markets.

Other Stocks That Warrant a Look

Here are some other 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.

JELD-WEN Holding, Inc. (NYSE:JELD) has an Earnings ESP of +7.69% and a Zacks Rank #2.

CACI International Inc (NYSE:CACI) has an Earnings ESP of +1.83% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere & Company (NYSE:DE) has an Earnings ESP of +5.32% and a Zacks Rank #2.

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