Is Triumph a Loser?

 | Feb 06, 2013 | 1:30 PM EST
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According to a Securities and Exchange Commission filing, John Drosdick, a director of Triumph Group (TGI), bought 5,000 shares of the stock on Feb. 4 at an average price of $69.21 apiece. Drosdick now owns 10,000 shares of Triumph, a $3.5 billion market cap company that designs and manufactures aircraft parts and components. This purchase doubles the number of shares Drosdick owns directly. He had previously bought shares in November 2012 at prices of about $64 per share. Insider purchases are often considered bullish signals for a stock because the insider is choosing to increase exposure to the company rather than diversify investments.

At the end of January, Triumph released fiscal third-quarter results. Revenue rose 8% from the same period in 2011, thanks to sales increases in all three of the company's segments. Cost of goods sold has been higher, but net income still increased 14% as margins expanded slightly. This brought earnings per share for the quarter to $1.51, roughly what Triumph earned per quarter in the first half of its fiscal year.

It's important to note that there is high customer concentration at Triumph: About half its revenue comes from Boeing (BA). Investors generally do not like to see customer concentration this high because sourcing decisions by the customer or a drop in demand can eliminate a large share of revenue. Also, concerns about the safety of Boeing's new 787 "Dreamliner" aircraft, as well as macro factors, have left Boeing's stock price about flat in the past year against a rising market, causing some market players to turn bearish on the company. Boeing recently filed fourth-quarter results, and while revenue was up from the fourth quarter of 2011, net income fell 30%. For an investor interested in Triumph, based on the insider purchase or the financials, this is a point worth investigating before buying.

Triumph trades at 11x trailing earnings. The forward price-to-earnings ratio, based on analyst expectations of earnings in the fiscal year ending in March 2014, is 10. Aerospace and defense companies are generally trading at earnings multiples in that range, so it's not surprising that a major supplier is as well. Boeing currently carries a trailing PE of 15, but Lockheed Martin (LMT) and Northrop Grumman (NOC) are valued at 10x historical earnings or lower.

We can't help but notice that, in absolute terms, the combination of earnings multiples in the 10 to 11 range and earnings growth rates that have recently been in the 10% range would generally be considered very strong. So, there is a bullish case for Triumph as long as the market for its products shows modest growth. A beta of 1.3 is certainly not low, but perhaps lower than expected for a company dependent on demand for aircraft.

While it's important to become familiar with a company before making a decision, Triumph does seem to be an intriguing value prospect. The stock is priced in line with many aerospace and defense companies at about 10x earnings, but it has been achieving solid growth rates. While the Boeing relationship is certainly a concern, it also indicates that Triumph is not as dependent on military spending (therefore not as threatened by federal spending cuts) as Lockheed Martin, for instance.

If we were satisfied that Boeing doesn't pose too much risk, we could see Drosdick's insider purchase as one potentially worth imitating.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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