Here's a good business lesson to remember:
Competition is bad for margins.
[THREAD] 👇🏽
Competition is bad for margins.
[THREAD] 👇🏽
1/ Transdigm $tdg is a company that sells airplane parts.
You can see the 7 parties it sells to, with Boeing and Airbus making up 20% of total sales.
You can see the 7 parties it sells to, with Boeing and Airbus making up 20% of total sales.
2/ Importantly, the company makes 60% of sales from aftermarket parts.
So if Delta has a 747 out of commission because of an ignition system breakdown, Transdigm will replace that part either directly or usually through an aftermarket distributor like Aviall (Boeing).
So if Delta has a 747 out of commission because of an ignition system breakdown, Transdigm will replace that part either directly or usually through an aftermarket distributor like Aviall (Boeing).
3/ Here's where it gets interesting.
90% of the parts Transdigm sells are proprietary and in 80% of the deals, the company is the sole supplier.
Couple this with a strong focus in the aftermarket and the picture becomes clearer.
90% of the parts Transdigm sells are proprietary and in 80% of the deals, the company is the sole supplier.
Couple this with a strong focus in the aftermarket and the picture becomes clearer.
4/ Going back to Delta, if that 747 breaks down, they MUST use Transdigm on that ignition system.
Transdigm was the SOLE supplier of that part for the OEM.
A 747 is $400 million, who CARES if you overpay to get a replacement part that allows you to keep running?
Transdigm was the SOLE supplier of that part for the OEM.
A 747 is $400 million, who CARES if you overpay to get a replacement part that allows you to keep running?
5/ This is exactly why margins are SO high, ESPECIALLY for a manufacturer.
6/ Before moving on, it looks like more than 75% of EBITDA comes from aftermarket.
That means aftermarket EBITDA margins must be higher than 50% (current EBITDA margins) b/c aftermarket only makes up 60% of sales and OEM sales are known to be lower margin.
That means aftermarket EBITDA margins must be higher than 50% (current EBITDA margins) b/c aftermarket only makes up 60% of sales and OEM sales are known to be lower margin.
7/ To get a better perspective on the power of playing where there is no competition, we'll compare Transdigm to Heico, another airplane parts manufacturer.
This is from Heico's 10-k.
It competes on price.
This is from Heico's 10-k.
It competes on price.
8/
Transdigm gross margins: 57%
Heico gross margins: 41%
Clearly, Transdigm has a pricing power advantage.
Transdigm gross margins: 57%
Heico gross margins: 41%
Clearly, Transdigm has a pricing power advantage.
9/ Further, this gap is probably understated b/c Heico has a business segment that doesn't solely deal w/ aviation.
Below you can see that Heico's Flight group's EBIT margins are about 19% and "electronics" is about 30%. The latter likely raises overall gross margins.
Below you can see that Heico's Flight group's EBIT margins are about 19% and "electronics" is about 30%. The latter likely raises overall gross margins.
10/ The point is: competition erodes margins.
Transdigm purposely makes parts and acquirers part makers where it can be the sole supplier.
Transdigm purposely makes parts and acquirers part makers where it can be the sole supplier.
/End
I'm not saying Heico $hei is a bad business. On the contrary, it's quite a good one.
The point is to illustrate the power of focusing on a niche with no competition.
Another disclaimer is Transdigm carries a lot of debt so net margins between the two are kinda similar.
I'm not saying Heico $hei is a bad business. On the contrary, it's quite a good one.
The point is to illustrate the power of focusing on a niche with no competition.
Another disclaimer is Transdigm carries a lot of debt so net margins between the two are kinda similar.
