Loar Holdings (LOAR) - Stock Pitch

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Loar Holdings Inc. is a diversified manufacturer and supplier of niche aerospace and defense components essential for aircraft and aerospace/defense systems. The company serves commercial, business/general aviation, and defense markets through its portfolio of 16 niche brands and over 15,000 proprietary products.

LOAR has established itself as a dominant player in niche aerospace markets, often serving as the sole supplier for many of its manufactured parts. This strong competitive position provides stability and pricing power, which is further enhanced by the company's diverse and proprietary product portfolio. With over 15,000 unique products, no single part accounts for more than 3% of 2023 net sales, and approximately 85% of the portfolio is proprietary, creating high barriers to entry and customer stickiness.

The company's revenue is well-balanced across commercial (45%), defense (18%), and business jet/general aviation (26%) markets as of 2023. This diversification helps insulate Loar from sector-specific downturns. Additionally, 51% of 2023 revenue came from the aftermarket segment, which typically offers higher margins and more stable demand compared to OEM sales.

Loar's financial performance has been impressive, with sales growing at a 38% CAGR and adjusted EBITDA at a 46% CAGR since 2012, demonstrating strong execution and margin expansion. This growth has been driven in part by a disciplined M&A strategy, with the company successfully integrating 16 acquisitions since 2012. Management has a clear playbook for identifying and integrating valuable targets, which has contributed to both revenue growth and margin improvement.

Looking ahead, Loar has significant organic growth opportunities, with management targeting 1-3 percentage points of annual organic growth from new product launches that address pain points in the aerospace industry. The company also focuses on margin expansion through productivity improvements, strategic pricing, and operational efficiency. These efforts are supported by strong industry tailwinds, as the aerospace sector is experiencing robust growth, particularly in commercial air travel and defense spending, providing a favorable backdrop for Loar's continued expansion.

Financials

• FY2023 Revenue: $317.5 million (32.6% YoY growth)

• FY2023 Adjusted EBITDA: $112.5 million (35.5% margin)

• FY2024 Revenue Guidance: $374-378 million

• FY2024 Adjusted EBITDA Guidance: $134-136 million

• Current Trading Multiple: 17.6x 2024E EV/Revenue, 48.7x 2024E EV/EBITDA

While the current valuation appears rich on traditional metrics, it reflects the company's strong growth profile, high margins, and strategic positioning in the aerospace industry.

Risks

Loar Holdings, while well-positioned in its market, faces several key risks that investors should consider. The company operates in the cyclical aerospace industry, which means its performance may be impacted by broader economic cycles affecting air travel and defense spending. This cyclicality could lead to fluctuations in demand for Loar's products and services. Additionally, while Loar has a diversified customer base, it still relies on major aerospace OEMs and defense contractors for a significant portion of its revenue, creating some level of customer concentration risk. The ongoing challenges in the aerospace supply chain pose another risk, as disruptions could impact production and delivery schedules, potentially affecting Loar's ability to meet customer demands. Given that a significant part of Loar's growth strategy relies on successful M&A execution, there are inherent integration risks associated with acquiring and incorporating new businesses into its existing operations. Finally, despite its strong market position and proprietary product portfolio, Loar faces competitive pressures from both larger aerospace suppliers and niche players, which could impact its market share or pricing power in certain segments.

Catalysts

• Continued Commercial Aerospace Recovery: As air travel returns to and exceeds pre-pandemic levels, Loar should benefit from increased aftermarket demand and OEM production ramps.

• New Product Introductions: The company's focus on addressing industry pain points through new products could drive additional organic growth.

• M&A Opportunities: Loar's strong track record in acquisitions suggests potential for value-creating deals in the future, such as the recently announced Applied Avionics acquisition.

• Margin Expansion Initiatives: Ongoing productivity improvements and pricing strategies could drive EBITDA margin expansion beyond current levels.

• Increased Defense Spending: Global geopolitical tensions may lead to higher defense budgets, benefiting Loar's defense segment.

If you have feedback/questions/comments on this pitch, please email [email protected] or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.