Time To Step To The Sidelines On TransDigm?

Jefferies said in a Wednesday note to wait on the sidelines of TransDigm Group Incorporated TDG, as the company accumulates free cash flow and de-levers. The firm believes the company is currently at the completion of one of its significant capital deployment cycles.

Accordingly, Jefferies downgraded shares of TransDigm from Buy to Hold and lowered its price target from $322 to $280.

Issues with Leveraging

Analysts Sheila Kahyaoglu, Howard Rubel and Greg Konrad said the company has used up $2.8 billion toward special dividends and acquisitions over the past year, with the funding coming from an increase in debt from $10.3 billion at the end of 2016 to $11.8 billion currently.

Therefore, the analysts believe further acquisition announcements will be limited until the company can de-lever or increase EBITDA. This, according to the analysts, can happen only over the next 3-6 months. As such, the firm sees limited upside to the share price over the near term.

See Also: Barclays: TransDigm A 'Victim Of Its Own Success,' Moves To Top Pick In Aerospace & Defense

Growth To Come Organically

Jefferies expects TransDigm's organic growth to be positive, given the company's shorter cycle Commercial AM and Defense business, which account for over 70 percent of sales. The firm estimated 5 percent organic growth for 2018 but a mere 1-point contribution from the lower margin Schroth business and three product line transactions.

"The acquisition contribution is minimal relative to prior periods given the significant investment in FY16," the firm said.

Lowering Estimates

Jefferies lowered its 2018 earnings per share estimate from $13.25 to $13.10, while the consensus is at $13.60. The firm now expects higher interest of $630 million, assuming an additional $1.8 billion of debt for the payment of the special dividend.