Under the Radar: Transdigm's Defensiveness

"Under the Radar" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

Aerospace and defense stocks have taken a hit since the Democrats reclaimed the White House and the defense budget took a back seat to stimulus packages.

Raytheon(RTN Quote), Lockheed Martin(LMT Quote), Boeing(BA Quote) and General Dynamics(GD Quote) are underperforming the Dow Jones Industrial Average so far in 2009. Yet, certain niche players have achieved gains in spite of the murky political scenario.

Cleveland, Ohio-based Transdigm Group(TDG Quote) designs high-tech components for all types of commercial and military aircraft. Its products include ignition systems, gear pumps, luggage bin latches and even lavatory equipment. The company maintains exclusive design rights on 95% of its products, which it sells to original equipment manufacturers and in the aftermarket.

Transdigm has an unconventional business structure. It is a conglomeration of 12 smaller entities, each with a specific focus. For example, Adams Rite Aerospace designs cockpit security structures, whereas Adel Wiggins Group focuses on fluid line components like heaters, hoses and refueling systems.

The fleet of focused subsidiaries has expertise in certain markets and considerable pricing power. Transdigm boasts an operating margin over 44% and a net margin near 21%. Those spreads compare favorably to aerospace giant Boeing, which achieved an operating margin of 6.3% and a net margin of just 3.7% in its fiscal first quarter.

Transdigm has a market value under $2 billion, so few institutional investors are privy to its success. Fiscal second-quarter revenue rise 10% to $193 million as net income and earnings per share improved 25% to $40 million and 80 cents, respectively. The company has achieved sequential and year-over-year earnings growth for 12 consecutive quarters.