TransDigm (TDG)

“You pay all the money up front, you pay all your own development, you develop your own products, you pay all your startup costs, you don’t make a lot of money on equipment production, and you recover your investment in the higher prices and margins in the commercial aftermarket. That’s very common.

To give an example, as I say, if you go to buy a car, and you pay $35,000 for the car, and you like the car and your spouse or your next-door neighbor says ‘I’d like that car too, I think I’ll go buy the parts and put it together in my garage,’ they’d probably pay $500,000 for that car.” 

Nick Howley, former CEO of TransDigm before the United States Congress

Howley sums up TransDigm's business model quite well in the face of the accusations made by the United States Defense General Inspector, who stated that the company was obtaining profit percentages ranging from 17 to 4,451% in 46 of the 47 parts on 113 contracts awarded by the Pentagon between 2015 and 2017.

“It’s like an octopus with 100 arms putting the squeeze on the Pentagon. The Pentagon is at the mercy of TransDigm – who owns the intellectual property – to buy the spare parts it needs to build the nation’s critical weapons systems.”

Chuck Grassley, Iowa Republican Senator

This high-profile trial (link) marked a turning point for many investors, but the truth is that TransDigm has changed very little since then and continues to be one of the most lucrative business models ever. In just 30 years, the company has gone from having revenues of $50 million to an EBITDA of $1,100 million.