What The Market Is Overlooking In The TransDigm Story

The recent selloff in TransDigm Group Incorporated TDG shares create an attractive entry point, Deutsche Bank said as it upgraded the stock to Buy from Hold.

Analyst Myles Walton also raised the price target to $290 from $282, with the revised target implying potential upside of 15 percent over Monday’s close.

Despite reporting better-than-expected fourth quarter earnings, investors were disappointed with FY 2017 shortfall to consensus EPS, leading to a pullback.

Walton pointed out that the investors missed the implied free cash flow growth in the 2017 forecast.

The company expects to end 2017 with cash in the range of $1.6-$1.7 billion. This implies a strong jump in operating cash flow which goes from about $670 million in FY 2016 to over $900 million in 2017.

“With the stock yielding just below 6%, we see buyers in the name on better clarity on the cash,” Walton wrote in a note.

However, Walton lowered his 2017 EPS view to $12.01 from $12.66 to reflect higher interest and taxes.

Meanwhile, TransDigm sees 2017 commercial OE to grow in low-to-mid single digits, commercial aftermarket to grow in mid-to-high single digits, and defense at flat to slightly up. Walton expects a “bit of outperformance” in the defense end market given spending trends in defense sector.

“The end market moves were in-line with our thinking and overall equate to a 4% organic growth, which seems to us a reasonable place to start against a relatively easy FY16 compare,” Walton highlighted.

Shares of TransDigm closed up 2.4 percent to $258.92.