TransDigm has strong historical performance and incentives, but faces material risks from regulatory intervention blocking acquisitions and high leverage.

So in 2025, they paid a special dividend of $90 per share. And a year earlier they paid $75 per share in dividends. So, well, they are a business that doesn't pay dividends. They also have cumulatively paid out $12.9 billion in special dividends over the last five years, versus only $136 million in dividends by Heiko over the same time period.

And train some setup is just sharper and sort of more private equity, like its intrinsic value metric, is pretty clever, but it's still built on EBITDA and in a multiple attached to it.

And so it rewards a playbook that leans heavily on debt and big special dividends.

And so with all that said, transforms results speak for themselves. They don't need my approval or validation, but that's just kind of how I think about it. Pretty much agree with you, but just for the sake of being difficult, I will play devil's advocate here and take a look at things from transients perspective.

So the Trans Am incentive structure is interesting, and it's really rare to see a business have a goal of increasing its intrinsic value like this, especially by 17.5% per year.

I mean, that's just a lofty goal for any business, let alone one that's worth several billion dollars.

Normally, if I'm perusing a businesses proxy and I see this, I'll just nod my head, think it's impressive, and assume they just aren't accomplishing that much because that hurdle rate is just so tough.

But over the past ten years, the share price has compounded at just under 18%. Now, keep in mind this doesn't include the special dividends I mentioned earlier, which obviously bump up the IRR even more.

So I think with Trans Dime, you do have a history of success in the business. Then you do have the incentive program that I think does a pretty good job of trying to increase. The one thing that we consistently harp on on this show, which is intrinsic value.

And I think the other incentives on EBITDA and EBITDA margins is also to just kind of help focus the company on generating cash.

Now, you do have to keep in mind free cash flow as a percentage. EBITDA is in the kind of 40% range, but it's still a decent proxy for the growth of free cash flow.

Well, seeing as we did add trans time to the intrinsic value portfolio for for a period of time, I'm pretty good with that conclusion. And you mentioned something on transcendent regarding a deal they recently made that didn't go through.

And this is one of those risks that I think is inherent with businesses that get to the pinnacle of success while having monopolistic tendencies, because regulators then become more likely to try and block their A efforts.

Right. I mean, it's really not something you want to see given that acquisitions are obviously integral to trans Times business model. So basically what happened was in June of this year, Trans Dime announced plans to acquire Stellantis systems for 960 million.

Not to be confused with Stellantis. So Stellantis Systems is your prototypical trans dime acquisition target. You know, they sell a number of industrial products, as well as repair and supply components used in radar systems for the US Navy's ages, combat systems, as well as the US Air Force's F-16 fighter jets, among other things.

Now, the deal was essentially just completely blocked by the Justice Department, and they blocked it simply because they felt it would give trans dime too much monopoly power on these devices, and they wanted to preserve some level of competition for some of the specific components.

And since that announcement, Trans Am share price is actually fallen by 11%. So clearly the market is aware of what's going on there.

Yeah. This is where transom scares me a little bit. They already had issues with regulators previously when it was determined some of the components had 1,000% or higher markups, which the US government did not appreciate.

And the Solent decision worries me because transoms whole model depends on buying sole source businesses, and so the better a target fits their criteria, the more likely regulators are to see the deal as reducing competition, especially on defense programs.

And if that becomes the norm. Transforms pool of Bible businesses could shrink. Or it may have to settle for deals that don't fit its playbook as well. Yes, absolutely. I think you're completely right on there, and it is pretty scary, I will admit.

You know, you never want to see regulators blocking a deal that perfectly fits your business model, because chances are, obviously they might do the exact same thing in the future as well.

So I will say, when you look at past, you know, I personally couldn't find any deals that were blocked by regulators.

So I would say this is definitely a larger risk for trans time than it is for Hiko. Now, another risk that I think that listeners can probably already guess that we'd harp on is debt.

So if there was a slowdown event such as, you know, something like Covid, which happened again, where commercial planes were grounded or their utilization rates go down, that would clearly affect both of these businesses.

Absolutely, for sure. But since they also do have military customers, that definitely helps provide some sort of floor. But if we look at trans lime, they're clearly much more exposed to the negative effects of debt than Hiko, as Trans Am carries that very, very large net debt to EBITDA ratio that we've discussed.

Now, it's worth noting that their leverage helps them improve their IRR on deals. So they have two risks that kind of stemmed from this debt risk. The first is that if they can't repay the debt, it can obviously cause all sorts of problems with their assets and cash flows.

And second, if the leverage ratio drops, well, then they won't be able to borrow as much for their deals, meaning the IRR would technically drop because they'd have to put proportionally more of their own money into the deals than if they can't use the same leverage ratio.

Part of the reason trans time can achieve 30% plus IRR on its deals is that it can use debt as part of the deal structure. And another thing that that really surprised me was how much resilience these businesses showed during Covid, which admittedly was.

A really hard. Time for any aircraft related companies. So both businesses took quite a hit to their stock prices during the lockdown. But given the long term nature of these businesses, if you were willing to buy somewhere around those lows of Covid, you would be looking at a very, very nice return by just holding on your shares and really doing nothing.

Yeah, and I was also impressed with their resiliency as well. But I think given the fact that the world, you know, we just we need airplanes, that's just the fact and that's whether that's for a commercial or military application.

I just really don't see that ever going anywhere. So, you know, unless you can forecast some kind of event that would ground planes for a very long and extended period of time.

I think it's a pretty low risk that these businesses wouldn't be able to sell and service components for a very long period of time, especially given the fact that they also service military aircraft, which are even during Covid, they're still going to be maintained.

So I will say there's definitely some sort of tail risk here, but it's pretty hard to weigh it that heavily because if demand experience is a temporary shock, it's likely to rebound later.

So both Trans Dime and Hiko had reductions in revenue for 2020 and 2021. But in both cases they have rebounded incredibly well. And if you take a long term view, it was really just a minor blip in a steady rise upwards.

And with Trans Am it's almost a reverse. The stock is cheaper, but more of the risk sits inside of the business itself. And that makes sense. And so the growth of both businesses has just been insanely impressive.

And it really comes down to two things organic growth or the ability to continue growing revenues of their subsidiaries that they already own, and then inorganic growth or the revenue associated with consolidating their income statements with newly acquired businesses.

So with both of these businesses. Growing so much over multiple decades, the looming question really is can they continue doing so? And and if so, for for how much longer? And then what is the composition of organic and inorganic growth.

Right. So picture this for a second. A 30 year old aircraft is sitting on a tarmac at your nearest international airport. The plane is still flying and generating revenue for the owner, but every bolt valve, seat belt and sensor on that plane will eventually wear out and need to be replaced multiple times before that aircraft is retired.

That plane isn't being redesigned, they're just running it for as long as they possibly can to get as much out of it as possible. And that, I think, is really the growth story in a nutshell.

More planes like this sitting around longer, constantly in need of more components over time.

So when I'm assessing a serial choir, I always have to ask this question. If a business is a true monopoly and already owns a large percentage of its target market, well then growth becomes that much harder to come by.