Triumph Group (TGI 2.78%) is combining two of its three largest divisions into a single aerospace-structure unit as the company looks to regain its footing, after years of struggles, and focus on growth. It might be time for value-focused investors to give Triumph a look.
The company said Dec. 4 it would merge its business making aircraft wings and related components, the largest contributor to its nearly $4 billion in annual sales, and its precision-component unit, which makes aluminum, metal and composite structures. The company said the two units share many of the same customers and suppliers and often collaborate on common programs, so it hopes it will be able to trim costs and gain additional business by combining them.
How Triumph got left behind
Triumph is an amalgamation of dozens of acquisitions over nearly four decades, but the company has been a laggard in the industry for some time now. Shares of Triumph are down 59% over the past three years, during which time rivals Spirit AeroSystems and TransDigm Group are up 93% and 40%, respectively.
Current CEO Daniel J. Crowley was appointed in January 2016 with a mandate to simplify a company that had grown to house 47 different operating entities spread across 72 locations worldwide. In the time since, he has used divestitures and division mergers to reduce those 47 operating companies to 17, while reducing Triumph's overall footprint by 1.3 million square feet and its total number of sites to 60.
Is Triumph finally catching up?
There are signs that the steps are beginning to pay off. Triumph officials said in November the company is about halfway to its goal of extracting $300 million in annual savings, in part by reducing overhead and redundant systems at what was previously a highly decentralized operation. The company expects to burn through about $275 million in cash in the current fiscal year and hopes to be breakeven in terms of cash flow in fiscal 2019, toward a goal of generating $200 million by 2020.
Triumph is also trying to diversify its business by adding more military content, with a goal of growing defense revenue from 20% of total to 30% in the next three years. On a conference call with investors last month, Crowley said the company's $12 billion pipeline currently contains more than $6 billion in defense work. In the process, he said, it is developing relationships for follow-on business at customers including Boeing and Northrop Grumman, "which will help Triumph reverse our revenue contraction in the years ahead."
The company could get a significant boost if, as it appears, the worst is finally in the past for one of its most troublesome businesses. Triumph has recorded losses and for a while was engaged in litigation with Bombardier related to disputed payments and cost overruns on the Global 7000 business-jet program, which is about two years behind schedule but appears finally ready to enter service in 2018.
Should the Global 7000 be introduced into service next year, significant fixed costs for Triumph will finally generate revenue. The company also has contracts to make wings for Embraer and Gulfstream jets, so it could benefit from any recovery in the market for new business aircraft.
If Crowley can execute, Triumph shares would have plenty of potential upside. The company currently trades at just 0.4 times trailing-12-month sales and 13.46 times last-12-month earnings, well below similar ratios at TransDigm (4.35 times sales and 34.64 times earnings) and Spirit (1.46 and 29.42, respectively).
In early 2016, when the CEO change happened, the simplest bull case for Triumph probably involved a buyout. Two years on, Triumph is beginning to look better on its own.