Transdigm
As a paying subscriber, this is an example of what you’ll get bi-monthly.
Transdigm is a company that sells airplane parts.
You can see the 7 parties it sells to, with Boeing and Airbus making up 20% of total sales.
Importantly, the company makes 60% of sales from aftermarket parts.
So if Delta has a 747 out of commission because of an ignition system breakdown, Transdigm will replace that part either directly or usually through an aftermarket distributor like Aviall (Boeing).
Here's where it gets interesting.
90% of the parts Transdigm sells are proprietary and in 80% of the deals, the company is the sole supplier.
Couple this with a strong focus in the aftermarket and the picture becomes clearer.
Going back to Delta, if that 747 breaks down, they MUST use Transdigm on that ignition system.
After all, Transdigm was the SOLE supplier of that part for the OEM.
To put this in perspective, a 747 is $400 million, who CARES if you overpay to get a replacement part that allows you to keep running?
This is exactly why margins are SO high, ESPECIALLY for a manufacturer.
Before moving on, it looks like more than 75% of EBITDA comes from the aftermarket. That means aftermarket EBITDA margins must be higher than 50% (current EBITDA margins) because aftermarket only makes up 60% of sales and OEM sales are known to be lower margin.
To get a better perspective on the power of playing where there is no competition, we'll compare Transdigm to Heico, another airplane parts manufacturer.
This is from Heico's 10-k.
It competes on price rather than a lack of competition like Transdigm.
- Transdigm gross margins: 57%
- Heico gross margins: 41%
Clearly, Transdigm has a pricing power advantage.
Further, this gap is probably understated because Heico has a business segment that doesn't solely deal with aviation.
Below you can see that Heico's Flight group's EBIT margins are about 19% and "electronics" is about 30%. The latter likely raises overall gross margins.
The point is: competition erodes margins.
Transdigm purposely makes parts and acquirers part makers where it can be the sole supplier.
I'm not saying Heico is a bad business. On the contrary, it's quite a good one.
The point is to illustrate the power of focusing on a niche with no competition.