We recently published a list of 10 Stocks That May Be Splitting Soon. In this article, we are going to take a look at where TransDigm Group Incorporated (NYSE:TDG) stands against the other stocks that may be splitting soon.
Understanding Stock Splits
A stock split is when a company literally splits its stocks – it divides its existing shares into multiple new shares. This increases the number of shares outstanding without changing the company’s overall value while making the stock more affordable and accessible to smaller investors.
A company’s board of directors determines the ratio of a stock split. This can range from a common 2-for-1 split, and go as far as 100-for-1, or more. For instance, in a 2-for-1 split, each existing share is divided into two new shares. The price per share is reduced by half, but the total market capitalization remains unchanged. So, a stock split can increase liquidity and potentially attract more investors, by giving 2 shares valued at $50, instead of 1 at $100, and the company’s market cap is not impacted.
As the share price adjusts downward, dividends per share will also be adjusted to maintain the same total dividend payout. Similarly, all things tied to the share price are adjusted according to the split. However stock splits are non-dilutive, so existing shareholders’ voting rights remain unchanged.
Stock splits aren’t just beneficial to small investors trying to buy shares in big companies, they can also benefit companies by allowing them to repurchase shares at a lower price. But in one way or another, the eventual goal is to enhance a stock’s appeal to investors and make it more accessible to retail or individual investors.
At the end of the day, a stock split does not inherently create additional value for a company, a good company remains a good company after a stock split. Similarly, a bad company remains a bad company. A temporary reduction in share price followed by higher investor interest might cause the stock to surge in the short run, but no meaningful impact should be expected in the long run.
Experts Weight In on The Market Situation Right Now
We’ve seen a range of high-profile stock splits in 2024, especially in the semiconductor space. They seem to be the new cool thing to do for every company. However, these moves should be treated as no more than just making shares more accessible to smaller investors, and value investors should focus on fundamentals when they’re contemplating their next best idea.
The markets have been on a wild ride, all thanks to AI. The valuations have gotten out of hand, but we’ve also seen some corrections. Analysts are expecting earnings growth of 15% in 2025 along with rate cuts of up to 225 basis points. The Fed is expected to deliver its first cut in September after hiking interest rates constantly and holding them higher for longer. Jeff Krumpelman, the chief investment strategist at Mariner Wealth Advisors, and Julie Biel, the chief market strategist at Kayne Anderson Rudnick, recently appeared together on CNBC to discuss these dynamics and both had similar but contrasting opinions.
Krumpelman expressed optimism, citing strong fundamentals and improving economic indicators, particularly inflation. He believes we’re not in a recessionary scenario and sees potential for the S&P 500 to reach 6,000 by mid-2025, driven by solid earnings growth, healthy guidance, and projected GDP growth of 1.5% to 2.0%. Here’s what he said:
“We look at the individual stocks, we find a broadening market, and we find general health in terms of earnings growth and valuation. So, we’re optimistic and constructive.”
Biel, on the other hand, raised concerns about potential risks related to high valuations making stocks more fragile. She emphasized that the last time the market was this optimistic was back in 1984, just once in modern history. Biel remained cautiously optimistic and pointed to the $1 trillion in credit card debt and rising delinquency rates.
Most successful companies have a history of stock splits, but their share prices consistently return to levels where another split is warranted. Yet it is a widely practiced phenomenon and investors globally anticipate such moves from big companies to improve trust. In this context, we’re going to talk about the top 10 stocks that may be splitting soon.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of an aircraft factory, showing a flurry of activity on the factory floor.
TransDigm Group Inc. (NYSE:TDG)
Share Price as of August 30: $1,364.37
Number of Hedge Fund Holders: 86
TransDigm Group Inc. (NYSE:TDG) is an aerospace manufacturing company that develops and manufactures engineered aerospace components and subsystems. It specializes in engineered products critical for the safety and performance of commercial and military aircraft.
Despite ongoing OEM (Original Equipment Manufacturer) production challenges and production rates below pre-pandemic levels, revenue and bookings grew strongly in the recovering aerospace market.
In the commercial OEM sector, revenue rose about 23% in FQ3 compared to the previous year. While supply chain and labor challenges persist, the company estimated a monthly build rate of about 25 aircraft by the end of this quarter.
For the commercial aftermarket, revenue increased by approximately 11%. The passenger submarket grew 16% due to repair sales, the interior submarket grew 8%, and the business jet submarket saw a 10% increase, reversing previous declines. Conversely, the freight submarket declined 8% due to the return of belly capacity.
In the defense market, revenue grew about 13%, with both OEM and aftermarket components contributing.
These factors helped record total revenue of $2.05 billion this quarter, with an improvement of 17.32% year-over-year. The earnings per share remained at $9.00.
The company faced a surge in share price by 51.14% in 1 year. This increase indicates the need for a stock split, despite the company having no history of a stock split previously.
It is actively seeking M&A (merger and acquisition) opportunities and is confident in finding suitable targets despite market challenges. Its capital allocation prioritizes business reinvestment, accretive M&A, and shareholder returns, with less focus on debt paydown for now.
The company recently acquired Raptor Scientific, investing over $2.2 billion in the past 3 months. This acquisition is projected to add $125 million to fiscal full year 2024.
The company has recently acquired SEI and the CPI Electron Device Business, which are progressing well under Patrick Murphy’s leadership. Revenue guidance increased to approximately 20%. Overall, the company is satisfied with its fiscal third-quarter performance and expects continued growth as it maintains its operational strategy and services robust demand.
As of June 30, 86 hedge funds hold long positions in the company, with the highest stake at $1,398,855,189 by Matrix Capital Management.
ClearBridge Global Growth Strategy stated the following regarding TransDigm Group Incorporated (NYSE:TDG) in its first quarter 2024 investor letter:
“U.S. aircraft parts manufacturer TransDigm Group Incorporated (NYSE:TDG) was our largest addition. TransDigm is a steady compounder with strong pricing power coming from regulatory barriers that limit the number of competitors and due to its proprietary intellectual property, which makes it a sole supplier of many certified aircraft parts. We believe the company will see long-term duration of growth ahead as it benefits from the expansion of the aerospace aftermarket and acquisitions in this still-fragmented space.”
Overall TDG ranks 3rd on our list of stocks that may be splitting soon. While we acknowledge the potential of TDG as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TDG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.