TransDigm (TDG): Beat, Raised Guidance, Closed Red — Is TDG Stock a Buy?

TransDigm Group (TDG) Q3 FY2026 — Fiscal Q3 2026, the 13 weeks ended June 27, 2026. Net sales $2,741M, +22.5% (organic +13%), vs ~$2.68B consensus. Adjusted EPS $10.87 vs $10.30 expected and $9.60 LY. GAAP EPS $9.39. EBITDA As Defined $1,447M, +18.9%, margin 52.8% from 54.4%. Interest expense $514M, +29.5%. FY26 guidance RAISED: sales $10,470-10,550M, adj EPS $40.62-41.46. TDG opened $1,355.60 (+5.5%), hit $1,359.27, closed $1,275.05 — red on the day. TransDigm beat on both lines and raised full-year guidance, and the stock still finished the session red — 6.2% below its own opening high, on nearly double normal volume. The reason is one line. Interest expense rose $117M year over year, which is $1.54 a share after tax. Adjusted EPS rose $1.27. The increase in the interest bill was larger than the entire increase in earnings. EBITDA As Defined is guided up 16% this year; free cash flow is up about 8%. THE CALL: HOLD (3/5, A GREAT BUSINESS AT A FAIR PRICE — THE INTEREST BILL IS NOW THE STORY) — base-case value ~$1355.0 vs ~$1275.05 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$1,355 vs the $1,275.05 close - about 6% ABOVE the price, less than one year's cost of capital. Cash-to-EQUITY DCF: free cash flow after interest, cash tax and the full capital budget, PLUS the borrowing capacity a constant 5.8x leverage creates, because that capacity funds the buybacks. FY2027 owner cash $2.90B growing 11% fading to 4%. At 9%: bear $889, base $1,357, bull $1,819. At 8% base is $1,708; at 10%, $1,123. 5 of 9 grid cells sit ABOVE the price and 4 below - a fair price, not a mispricing. Reverse-DCF: today's price is our base case at a 9.35% cost of equity. - THE BEAT AND THE RAISE ARE BOTH REAL. Net sales $2,741M, +22.5% ($504M), vs ~$2.68B expected. Adjusted EPS $10.87 vs $10.30 consensus and $9.60 LY - like-for-like, both adjusted and diluted. GAAP EPS $9.39 vs $8.47. FY26 adjusted EPS guidance went from a $39.52 midpoint (May 5) to $41.04, up $1.52 against only a 57c quarterly beat - so ~95c is genuine FORWARD raise. - HOW MUCH OF THE 23% DID THEY BUY? The release says organic growth was 13%: ~$291M of the $504M increase, so ~$213M (42%) was acquired. Reported aftermarket went $698M to $908M (+30.1%) but the CEO said 17% - the gap is Jet Parts Engineering / Victor Sierra, the $2.2B deal closed April 7. Commercial OEM +19.2%; Defense +19.2% with backlog building. - WHERE THE 160 BASIS POINTS WENT - management's explanation CHECKS OUT. EBITDA As Defined margin 52.8% vs 54.4%. Power & Control (where the deals landed) earned $808M on $1,509M = 53.5%, down from 56.7%, -316 bps. Airframe, which bought nothing, earned $645M on $1,186M = 54.4%, UP from 53.8%. The base business expanded; the acquired book dilutes the average. - EBITDA UP 16%, FREE CASH FLOW UP 8% - one line explains it. 39-week operating cash flow $1,691M less $205M capex = $1,486M FCF vs $1,375M (+8.1%), while revenue was +18.4%. Cash interest paid $1,210M vs $908M, +33%. Gross debt $33.5B vs $2,773M cash = $30.7B net, 5.8x. Guided FY26 interest of $2,020M is 36.6% of the $5,520M EBITDA As Defined guide. The raised guide implies a Q4 margin of 52.3% vs 54.1% LY - MORE compression. Shares out 55,276,525 (10-Q cover) x $1,275.05 = $70.5B; EV $101.2B. What to watch: Changes our mind UP: EBITDA As Defined margin stabilising for two quarters, and free cash flow growing in line with EBITDA again. Confirms the bear: another debt-funded acquisition while margins keep sliding and Q4 lands at the implied 52.3%. We would get interested near $1,100. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.