The Next TransDigm? This Stock’s Monster Move Makes It A Shoo-In

Investors would like to believe that Loar Holdings (LOAR) is the next darling among aerospace stocks. And they have good reason, because Loar stock has made a massive move since its initial public offering in April, capped by a recent breakout.

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Loar produces aircraft spare parts and offers servicing in what is known as the aftermarket. Its portfolio of more than 15,000 products include angle-of-attack sensors, cockpit door barriers, flight control computers, water purification systems and more. Major customers include RTX (RTX) and Honeywell (HON).

Lately, it has targeted a number of aerospace firms for acquisition. Since 2012, Loar has put 17 companies under its roof, including Applied Avionics, its first post-IPO deal.

The Applied Avionics acquisition, announced in August, underscored why Loar is a new aerospace stock to watch, says analyst Ken Herbert of RBC Capital Markets. And it’s not just because he expects the deal to immediately boost Loar’s earnings.

“The best comparisons for Loar are Heico (HEI) and TransDigm Group (TDG), two of the most successful aerospace and defense stocks over the last 20 years,” Herbert wrote in a recent note to clients.

The reason is those larger aircraft component suppliers have also benefited from strong aftermarket demand and savvy acquisitions. Like Loar, they focus on niche, proprietary and highly engineered products, which gives them significant pricing power.

Finding Strength In Older Aircraft

Loar says its aftermarket strength is linked to older planes, which need more replacement parts in order to stay in the air. The rollout of new jets since the Covid-19 pandemic has been plagued with problems, which also has given Loar a boost.

More generally, the commercial and defense aviation markets — and their aftermarkets — continue to grow. Air travel continues to recover from the pandemic hit, with plane “destocking behind us,” Loar says.

In 2021, there were 20,675 commercial jets in service, according to Loar’s S-1 filing. That was up from 17,712 in 2010, with the industry projecting a need for 34,684 commercial jets by 2032.

On Oct. 18, Morgan Stanley named Loar, Heico, TransDigm and FTAI Aviation (FTAI) as key beneficiaries of “sustained” aftermarket strength, citing in part the Boeing (BA) workers’ strike, which disrupted manufacturing chains.

The firm hiked price targets across the group, including a Loar stock increase to 75 from 70. It slashed the Boeing target to 175 from 190.

How Loar Stock Shot Up

On Oct. 22, Loar cleared an 80.79 buy point from a first-stage, five-week flat base, per IBD MarketSurge pattern recognition. That move came in the biggest volume since the base began to form, a positive sign. Shares made a new high the following day, but closed lower amid a market sell-off and fell below the entry.

Loar’s relative strength line is rising but remains below the peak of the latest base. It would be a good sign to see the RS line catch up with the stock and reach new high ground. A rising RS line, the blue line in the chart shown, means that a stock is outperforming the S&P 500.

When the aerospace and defense parts supplier went public in April, it sold 11 million shares for 28 apiece. That came in above its estimated range of 24 to 26, and raised more than $300 million.

On its first day of trading, Loar stock closed at 48.80, soaring 74% above the IPO price, a sign of big institutional demand. It has now nearly tripled from the IPO price, up more than 182%.

Loar Earnings Outlook

In its S-1 IPO filing, Loar revealed that most of its 2023 sales came from proprietary products and aftermarket sales, which tend to mean high margins and recurring revenue, respectively.

On Aug. 13, Loar reported earnings of 13 cents a share for the second quarter, on sales of $97 million. Year over year, sales jumped 31%. On an organic basis, which includes existing businesses minus acquisitions, sales grew 17%.

Loar Chief Executive Dirkson Charles credited “exceptional commercial aftermarket growth” for the second-quarter results.

The company also raised its full-year outlook. Loar is now predicting 2024 sales of  $374 million to $378 million, up from $370 million to $374 million in May.

Loar Stock: Analysts See Higher Sales

Four analysts covering Loar stock project sales of $386 million for the full year, well above the company’s outlook, FactSet shows.

For the full year, analysts expect Loar earnings of 43 cents per share, jumping 69% in 2025 to 70 cents. The company did not respond to an interview request.

Jefferies analyst Sheila Kahyaoglu expects 2025 earnings of 80 cents a share, saying that the second-quarter report showed “better profitability on aftermarket momentum.” She has an 85 price target on Loar stock.

Kahyaoglu sees “further runway” in what she calls a compounder growth story. “Loar has just 0.4% market share today vs. Heico and TransDigm at 3%,” she said.

For more ideas about the best initial public offerings to buy and watch, check out IBD’s IPO Leaders screen.

Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.

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