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What Is The Next Target Of 2017 From The Wall Street Traders?
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Andrew Left sure knows how to pick a fight.

A little more than a year after his improbable takedown of Wall Street darling Valeant Pharmaceuticals, the blustery short seller is at it again. And the head of Citron Research is using the same blueprint as he sets his sights on TransDigm and its founder and Chief Executive Officer Nicholas Howley.
To hear Left tell it, TransDigm is another Valeant waiting to happen. He alleges the same price-gouging and debt-fueled financial engineering to explain how the aircraft-parts supplier delivered Valeant-like stock returns exceeding 1,500 percent in the past decade -- and made Howley one of America’s best-paid executives. In the past five years alone, he took home $278 million. At Boeing, a company 30 times the size, CEO pay was less than half that.

“There’s a thin line between brilliant and being crazy,” Left told Bloomberg. “While it works, you’re brilliant, but when it fails, you’re irresponsible.”
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The accusations rankled long-time investors and were met by howls on Wall Street for being inflammatory, flawed or inaccurate. Greg Rufus, who was TransDigm’s CFO for 15 years and was one of the chief architects of its growth, also strongly disputed Left’s assertions. Both Howley and the Cleveland-based company declined repeated requests for comment.
“If the guy was here, I’d read him the riot act,” said Rufus, who retired in September. “This company is nothing like Valeant.”

Still, some aren’t taking any chances. Since Citron published its report on Jan. 20, shares of TransDigm have slumped 13 percent, prompting it to delay a loan refinancing deal. And as President Donald Trump squeezes defense contractors like Lockheed Martin and Boeing, Left foresees an even bigger comedown.
Conflicting Opinions

TransDigm hasn’t been accused of wrongdoing by regulators and few on Wall Street agree with Left. (He sees TransDigm, which last traded at $219.68 a share on Wednesday, falling to $166 and possibly lower. Analysts say the stock should be closer to $300 in the next 12 months.)
But if nothing else, Left’s public campaign has raised thorny questions about the aggressive business and pay practices of a company that even its media-shy CEO said was one of the biggest that “no one ever heard of.”

By almost any measure, TransDigm has been a big success since the 64-year-old Howley, a mechanical engineer and Harvard Business School grad, started the company with a former colleague two decades ago.
Since going public in 2006, Howley has completed roughly 30 deals, most of them debt-financed, and turned his initial $50 million investment into a company with $11.6 billion in market capitalization.

His business model, which reflects a private-equity ethos of its former owner Warburg Pincus, relies on repeatedly acquiring key, hard-to-manufacture aerospace parts and then raising their prices -- much like Valeant did with drugs. For example, after TransDigm bought Aerosonic in 2013, it quadrupled the price of its vibration panels to $271 from $67.33, according to trade publication Capitol Forum, which provides analysis on government contracts.
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Comparative returns: TransDigm vs. Valeant
That kind of pricing power has pushed TransDigm’s gross margins above 50 percent in every quarter since becoming a publicly traded company, data compiled by Bloomberg show. It’s also helped shareholders reap returns averaging almost 30 percent a year.

“Their margin structure is the best in the industry and has been since the beginning,” said Ted Scalise, a money manager at TIAA Investments, which is among TransDigm’s top 20 shareholders. “If you write down a list of everything you’d use to evaluate management, it’s all been strong.”
Left sees that as a red flag and says the price increases mask a lack of growth and a burgeoning debt load, which now exceeds $10 billion.

“The stock has done well but it has not grown based on organic growth, it’s based on acquisitions,” he said. The risk is that “one day, like everything else, you run out of things to buy and prices to raise.”

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