With TransDigm Group Incorporated (NYSE:TDG) It Looks Like You'll Get What You Pay For

TransDigm Group Incorporated's (NYSE:TDG) price-to-earnings (or "P/E") ratio of 47.7x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for TransDigm Group as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for TransDigm Group

Keen to find out how analysts think TransDigm Group's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For TransDigm Group?

In order to justify its P/E ratio, TransDigm Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 741% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 10% each year, the company is positioned for a stronger earnings result.

With this information, we can see why TransDigm Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that TransDigm Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with TransDigm Group (at least 2 which shouldn't be ignored), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on TransDigm Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com