Can Triumph Group Fly Right?

 | Sep 06, 2013 | 1:00 PM EDT  | Comments
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Viking Global, a hedge fund managed by billionaire Andreas Halvorsen, recently filed a 13G with the SEC disclosing a position of 2.8 million shares in Triumph Group (TGI), a manufacturer of aircraft components with a $3.7 billion market cap. According to our database of 13F filings, Halvorsen and his team had not owned any shares of Triumph at the beginning of April before buying 2.1 million shares in the second quarter of the year. These additional purchases have increased Viking's stake to 5.4% of shares outstanding, triggering the regulatory filing.

Last fiscal quarter, Triumph increased revenue by 6% vs. a year earlier, with growth led by the aerospace segment. This business was responsible for 23% of sales for the quarter; however, this was partly driven by Triumph's acquisition of two companies in the past year whose operations are included in that segment, including the purchase of Goodrich Pump & Engine Control Systems to help Triumph break into the fuel systems market. In addition, revenue in the company's other two segments -- aerostructures and aftermarket services -- were down. With the company's costs rising, operating and pretax income each showed little change compared to the prior year. Reported earnings per share increased, but this was due to a lower effective tax rate. Cash flow from operations was stable outside of an increase in the company's working capital.

Even with the recent acquisitions and other factors still not doing much for Triumph's bottom line, Wall Street analysts expect an increase in earnings per share. This contrast with the stock's trailing earnings multiple of 13, which suggests that investors are more cautious of the company's growth prospects. Between this low valuation and consensus forecasts of more than $7 in earnings per share for the forward fiscal year, Triumph's forward price-to-earnings ratio is only 10, which would make it a good value play if sell-side predictions prove correct. In cash flow terms, the stock looks a bit more expensive, with the trailing EBITDA numbers resulting in an EV/EBITDA multiple of 7.5x.

One close peer of Triumph is Spirit AeroSystems (SPR), which reported a net loss in the second quarter of 2013 due to large forward loss charges on some Gulfstream contracts. Its business went fairly well apart from this, with total revenue for the company up 13% from a year ago and operating income in its other two segments (which are larger sources of business) rising. This suggests that financials should recover at least somewhat in future quarters, and Spirit is valued at a small discount on a forward earnings basis as the P/E on those terms is only 9. Of course, investors may not want to take these estimates on face value.

Triumph Group has recorded decent earnings numbers in recent quarters compared to its valuation, though the business appears to be struggling outside the aerospace systems segment, which may be buoyed by recent acquisitions. Acquisitions aren't a sustainable source of earnings growth, and integration risk is a concern (although Triumph's two recent acquisitions are still small compared to the overall company).

We would be skeptical that the company could increase its earnings per share in line with analyst expectations. Since 12-13 times earnings seems like an appropriate valuation for a company with stable profits, we'd assume that Halvorsen and his team are looking for at least moderate growth, though retail investors may be more reluctant to buy unless improvements in operating income become more broad-based.

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