Sen. Elizabeth Warren (D-MA) is calling for an investigation into TransDigm (TDG), an aerospace parts manufacturer that services the Department of Defence. The stock is down 3% on the news.
In a letter obtained by CNBC, Warren said she’s been monitoring reports that the company uses its opaque pricing structure to charge exorbitant prices for its parts. In many cases, TDG is the sole manufacturer of these parts.
Warren is the second Washington lawmaker to call for a probe into TDG. The first was Rep. Ro Khanna (D-CA), who also wrote a letter to the inspector general of the Department of Defence. Khanna’s letter went as far as accusing the company of “waste, fraud and abuse in the defence and industrial base.” He called the company a “hidden monopolist” that engages in “unreasonable” pricing increases.
This echos what Wall Street short sellers have been saying about the company for some time. In January, Citron Research put out a paper outlining how the company grows through debt-fuelled acquisitions and eye-popping price increases, which it then passes along to the government.
“TransDigm’s business model is to aerospace as Valeant was to the pharmaceutical industry,” Citron founder Andrew Left wrote in the report. “TransDigm acquires aeroplane parts companies (over 50 in total), fires employees, and egregiously raises prices. This business model has made them a dominant supplier of aeroplane parts to the aerospace industry while burdening its balance sheet with sky-high debt load: in fact, 6.5x EBITDA leverage.”
What Left described there is a classic “roll up,” a company that grows through acquisitions. In these cases, companies usually succumb under the weight of their debt before they can grow into a company that can pay it back. Short sellers believe TDG is no different.
From Moody’s (emphasis ours):
“During 2016, TransDigm incurred a substantial amount of indebtedness — well beyond the bounds of internally generated cash flow — to fund a large-sized special dividend to shareholders and to finance the company’s aggressive acquisition strategy.
“This resulted in very high financial leverage with September 2016 Moody’s adjusted debt-to-EBITDA of around 7.5x. Over the next few quarters, Moody’s expects TransDigm to deliver to more sustainable levels through continued earnings growth and any near-term leveraging transaction would likely result in downward rating pressure.”
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