Management Comments on TransDigm’s Moat

11 May 2016 | by Sean Stannard-Stockton, CFA

When we talk about a company having a “moat” we’re referring to the competitive dynamics that reduce the ability for competitors to come in and steal profits. Arif wrote about this concept in depth in a recent post.

On their earnings call yesterday, our portfolio holding TransDigm Group (TDG), which sells airplane parts, was asked about the long-term defensibility of their moat. Their answer illustrates very well the sort of situation we look for in companies we add to our portfolio.

“If TransDigm went bankrupt and died and all our plants caught on fire, ultimately the airline industry would find a way to survive. So, it’s not that there is no way to get around us. But there is a significant entry barrier, there is a significant cost, there is a significant qualification.

There is also the issue that we own the IP [intellectual property], so you got to find the way around that. It’s a substantive barrier that we frankly have not seen any material change in. Now, is it impossible? If you don’t care about the costs, you can always find the way around most anything. But I don’t see any fundamental change in the switching cost characteristics here.”

As management points out, it certainly isn’t impossible for competitors to go after TransDigm’s business. But there are numerous barriers that make doing so difficult.

Ensemble Capital’s clients own shares of TransDigm Group (TDG).

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.