Following Rep. Ro Khanna (D–CA)'s letter to the Department of Defense, dated March 17, urging additional scrutiny on TransDigm Group Incorporated (NYSE: TDG)'s contracting process, Height Securities said Congressional support for review may be growing.

Alleviating Audit Burden

Meanwhile, analyst Nil Tracy noted that the legislation introduced by Rep. Mac Thornberry (R–Texas), the chairman of the House Armed Services Committee, reduces the overall Defense Contract Audit Agency audit burden in terms of the number and expense faced by companies contracting with the DoD.

Height Securities feels a reduction in the number of DCAA audits will reduce the overall audit capability to be exercised on acquisition contracts. This reduction is reflective of a legislative push by Sen. John McCain (R–N.M.) and Thornberry to reduce regulatory oversight in the defense acquisition process with a goal of streamlining the process, the firm said.

Overall Trend Favorable For TransDigm

While Khanna and Rep. Tim Ryan (D–Ohio) have targeted TransDigm for enhanced scrutiny, the firm noted the overall trend has been favorable for the company.

Given the relatively low level of pressure being exerted in support of an investigation, and legislation aimed at reducing the overall audit burden on contractors, Height Securities believes it is unlikely Congress will increase the scrutiny of TransDigm contracts.

The firm doesn't believe there will be noteworthy changes to the current TransDigm contracts, even if the Office of the Inspector General, a branch of the DoD launches an investigation. The belief is premised on TransDigm's critical role in being a single source supplier in the defense supply chain that is unlikely to be eliminated.

"Taken together, these events indicate a solidifying of political positions around the issue of increased scrutiny on DoD contracting, with the net effect of reducing the likelihood of future action to review TransDigm's contracts," Height Securities commented.

At time of publication, shares of TransDigm to were up 2.03 percent at $262.63.

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