Grab Hold of This Knee-Jerk Reaction

 | Mar 04, 2013 | 11:00 AM EST
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For the past 10 years, Triumph Group (TGI) stock has sold for an average of 15x to 16x earnings per share. Right now, the shares are at 12x earnings -- yet the Wayne, Pa., aerospace company is doing well, and analysts expect rising sales and profits this year and next.

In other words, this is probably a good buying opportunity, as it's a chance to pick up Triumph shares under the normal multiple.

I suspect this depressed multiple has arisen, in part, because investors think of Triumph as a military contractor. We all know about how the sequestration will cut military spending by $42.5 billion from previously planned levels. Many of us suspect, moreover, that this won't be the end of the cuts.

However, according to Standard & Poor's -- which has Triumph's BB-rated debt on watch for an upgrade -- the company gets only 30% of its revenue from the military. About 50% comes from civilian commercial aviation (notably Boeing (BA)) and about 13% from private jets. The other 7% is miscellaneous.

I think that, to some extent, Triumph shares are falling victim to a knee-jerk aversion to defense stocks. Also, as a supplier to Boeing, it has been indirectly affected by the battery problems that have meant the effective grounding of Boeing's new 787 planes. I view this as only a temporary problem.

Some insiders seem to agree with me: Two directors added to their Triumph holdings in February. One of them, Joseph Silvestri, a managing partner at Court Square Capital Partners in New York, bought 8,000 shares, worth about $579,000 at current quotes. As of his most recent disclosure, he owns a total of 144,100 shares, valued at more than $10 million.

The other, John Drosdick, is chairman of PNC (PNC) Advantage Funds. He picked up 5,000 shares, doubling his holding. His 10,000 total shares are worth about $720,000.

The analytical community is sweet on Triumph, too. There are 13 buy ratings out on Triumph Group, and only two neutral ratings. Paradoxically, this makes me uneasy, as I usually like to go counter to prevailing opinion. I also normally prefer stocks on which analytical opinion is split, which I think -- other things being equal -- creates a better chance for capital gains.

Still, I am not going to be such a reflexive contrarian that I discard consideration of a stock merely because most analysts like it.

The dividend, $0.04 a share per quarter, is modest. But there is plenty of room to increase it, and I hope that Triumph will do so.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston. He can be reached via email here.

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