What The Market Is Overlooking In The TransDigm Story

The recent selloff in TransDigm Group Incorporated (NYSE: 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.