TransDigm 凭借独家供应垄断拥有持久的定价权，推动长期复利增长（收入 17%、EBITDA 18%），因此其高杠杆对优质投资者而言可以接受。

How transom gets called a monopoly on the floor of Congress, had to pay the Pentagon back millions of dollars for overcharging on parts, and just have a $900 million acquisition blocked by regulators.

But none of that has slowed the business down one bit.

So we concluded in that conversation that Hiko was a higher quality business than trans nine, but we didn't really dig into specifically why that is.

So we've covered trans time on the show before, and I definitely saw why the company is beloved in many quality investing spaces.

Just to give you an idea of just how profitable the industry is. And both Hiko and Transom has very nice profit margins as well. You know, not quite as high as GE aerospace but still very solid with high Co coming in around 18% and trans nine producing profit margins of about 21%.

Daniel pitched trans time to me about a year ago, so I can maybe start us off there as we do the comparison. So Trans Time is a designer, producer and supplier of highly engineered components that are essentially critical parts of commercial and also military aircraft.

But what I think is probably most interesting about Trans Am is actually their founder, a gentleman whose name is Nicholas Howley, and he no longer leads the business, but he still is the chairman of the board.

And the gist of why he founded the business was that a large percentage of an aircraft components were made by a single certified manufacturer like GE aerospace, and that manufacturer would remain the sole legal source of those parts throughout the aircraft's entire life cycle.

So that sounds like a pretty good business model to be in, right? And that life cycle can last 30 years plus. So how we recognize that if he could be a supplier of these parts, he would have a very long lived asset and entrenchment into this industry, since the parts would need to be continuously purchased throughout the aircraft's lifecycle.

And so instead of approaching this by trying to engineer the parts himself and going through these lengthy regulatory hurdles, he built a conglomerate around acquiring the suppliers that already had their toe dipped into this space.

Yeah. And I mean, getting an annuity like revenue stream from these businesses is just a great idea, right? So we really love businesses that we can forecast well into the future.

And I think a business like Trans Dime really gives you that.

But it's worth noting that Trans Am specifically has three value drivers in which the company was built on. So in Howie's view, the only three things that can increase the intrinsic value of a company are to either decrease costs, increase prices, and win new business.

That's pretty much the DNA that Trans Dime was built on.

And I think Trans Am has done a great job on all three of those value drivers, which is why they've compounded revenue at 17% and EBITDA at 18% for over two decades.

I know Trans Time is very diligent about the acquisitions they make, because they want to ensure that they are truly proprietary and the sole source before acquiring. And so Howie mentioned that many of the businesses that they're trying to acquire claim to be proprietary, but actually a lot of the time they weren't.

Right. And I think that he found that to be kind of a real bottleneck, at least for the beginning part of the business, because, you know, if you want to have pricing power, which is one of trans times key tenets, then you need to have that monopoly like angle to really get there.

So I just really want to make sure that our listeners understand how trans I'm works, because it's really important. So when a new plane is built, much of the value accrues to the aircraft manufacturer, whether that's, you know, Boeing or Airbus.

Then on the engine side, that would be handled by companies like GE aerospace, Pratt and Whitney and Rolls-Royce.

So these businesses are all referred to as original equipment manufacturers or OEMs. So Trans Dime does offer parts that do go into brand new aircraft. So they'll offer parts that do go into engines.

But we're trans dime and also Hiko really shine is kind of in this aftermarket section.

In those aftermarket sales make up about 55% of trans times business. So not trivial at all. And before we discuss Hiko business model, I have to mention that Trans Am has three primary business segments to it.

There's power and control. There's the airframe segment. And then there's a non aviation segment.

And so power and control provides components that help provide planes with well power or control of the other parts. So this includes things like ignition system specialized pumps and valves, generators sensors and more things in that vein.

Whereas the airframe segment, that is the part that deals more with what you'd find in the fuselage of the plane. So parts that open and keep doors close and cockpit security and and washroom components and seat belts and parachutes and more stuff like that.

Whereas the non aviation segment is more of a rounding error to be fair for trans times revenue. So we probably shouldn't get into it too much. But you can see that many of the parts they already manufacture have applications in other industries as well.

Right? Seat belts and actuators and fuel valves have pretty broad applications. So there's sold to other industries such as ground transportation and mining and construction and also the oil and gas industry too.

Yeah there really is a very wide range of applications for what they make. And I could see some of these industries being absolutely massive. But they haven't really made growing this part of a business a priority.

So I assume there's probably enough opportunities right now, at least in the aerospace components industry, for them to just not have to put too much effort into the non aviation sector.

Now transform grows both organically driven by its value drivers and then also through M&A.

going back over the last two decades. That's a median figure. So I will admit, though, it is very clear in case that many of its subsidiaries are much needed by the aerospace industry.

Yeah. I mean, I think it's kind of impossible here not to give the edge in terms of debt to Heiko when you account for trans dime's kind of bond, villain size debt pile.

I'm so trans I'm through. Its chairman, Nicholas Hawley, is very specific about how it improves incoming acquisitions. Sometimes they will buy a business just to carve out very, very specific product lines then.

So the parts that they don't like this allows them to leverage their three value drivers price increases, cost reductions and new business, which helps drive further margin expansion as well as organic growth within their acquisitions.

So a great example of this framework in action that Trans Am shared was in this business called Ester Line Technologies. So this was a business that they acquired back in 2019.

They ended up selling about a quarter of the business, getting rid of these non aerospace units or businesses that didn't fit their criteria. But over a five year period they actually doubled their EBITDA margins in that one business.

Gosh that's a pretty incredible acquisition, especially when you consider that the size of it was done at $4 billion.

Yeah, it was a very nice acquisitions. And you know, if you remove debt from it. I think I prefer trans Dime's M&A framework. I like their ability to really increase margins over time by leveraging their value drivers.

So what I was looking closely at Trans Am, I could see perimeter solutions, DNA just all over it. You know, the way they optimized new acquisitions based on very specific criteria and these value drivers, but they also utilize a little bit of leverage.

Don't think it's fair to take the debt part out of the equation, because obviously it exists and it's real. And there is also the chance, of course, that Hiko also has their own way of optimizing their own margins, and maybe they just choose not to discuss it with shareholders or competitors.

So I do want to add onto the whole debt thing, because it's important to understand the magnitude of debt that trans time is currently carrying.

I thought the number was pretty scary and notable when Daniel pitched it way back a year ago, but given the quality of the business, I think generally it's safe to say I was pretty okay with it, which was why we did end up adding trans time to the portfolio for at least a brief period of time. The intrinsic value portfolio.

Yeah. So the really eye popping numbers from Trans Am is just their net deposition of about $31 billion. So this puts their net leverage ratio somewhere in the 5.8 times range.

So EBITDA to interest is three times for trans versus 11 times for Hiko. And like I mentioned earlier, given the fact that transom is often the sole source for many of its components, it does give them some permission to lever up a bit on these deals if it thinks it can continue finding more of them out there with similar sort of competitive advantages.

So Daniel made a really good point to me in his pitch on Trans Time about their monopolistic positioning. And my conclusion was that there are two separate kinds of monopolies.

You know, there's the government granted monopolies and then there's natural monopolies. And so a government granted monopolies, one where the government evidently grants a company a monopoly, you know, so think about telecom businesses where they enjoy some regulatory privileges, but a natural monopoly is really the best possible kind, because under a government monopoly, the government can give it and it can take it.

And so at the time, Daniel even showed a clip where the House Oversight Committee tried to understand why companies like Trans Dime don't have competition. And when the government can't step into a business that has a monopoly, there just really isn't as much they can do to stop a business from utilizing its pricing power.

And so that is really the position that trans time is in.

Yeah. And it's a really beautiful position to be in, although I know Charlie Munger would disagree. So when asked if he was familiar with trans Time, he said, I don't like that way of making money.

It's just too brutal. They figure out something that has a little monopoly due to the Defense Department regulations, and they raise the price ten times and their famous for it. I regard that as immoral.

I would probably mostly agree. I don't think it's an investor's job, certainly to to be policing what a business charge is and if trans times customers are willing to keep paying, that does tell you what the parts are worth to them.

And it's really about returning as much value to the customer as possible, rather than extracting as much pricing power as possible. So for me, the question is less about morality and more about how durable the pricing power is.

If the customer ever gets a chance to to meaningfully push back. So if we looked at Transform and Hiko, though, through this lens of of being a monopoly.

Probably have to go with trans Dime. You know, just the fact that they are the sole provider for a large number of their parts means that just there's no alternative that exists.

I think trans time is is probably the Jordan and that matchup. Just ruthless, relentless and not really especially concerned whether the other side likes it.

But I mean, come on, don't get me wrong, I still see Jordan as being the greatest basketball player of all time. So it's not a perfect metaphor, but I do like it as a bit of a framework.

Another really good point that Daniel made when discussing Trans Am was that this business keeps customers coming back despite changing financial circumstances. Sure, if something like Covid happens, well, yeah, you know, planes are going to be grounded, but they're still aging.

So you may have to wait. But at some point, those aircraft components do need to be serviced. And there really is no option to just cheap out on replacing these parts. You can't just go to Lowe's to pick up a screw that's going to be used on an airplane.

What I like is how self-reinforcing these dynamics can be. Once a part works, customers have little reason to go shopping for something new. And even when budgets get squeezed, like during Covid, the maintenance can be delayed.

But it can never be skipped. Ultimately. And because the cost of failure is so catastrophic, nobody wants to be the one, of course, who gambles on an unproven supplier. So if you put all that together, being the incumbent becomes enormously valuable.

It's a really significant status quo advantage. And so I think this does play out a little bit differently for each company, though. For trans time, all three simply lock in the status quo, since customers are often buying the only approved part in existence.