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Here's Why Shares of Triumph Group Surged on Friday

By Lou Whiteman – Apr 5, 2019 at 11:36AM

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The troubled aerospace supplier is seeking to shed a low-margin operation.

What happened

Shares of Triumph Group (TGI -1.10%) soared 20% at the open Friday morning after the long-struggling aerospace supplier said it would seek a buyer for its aerospace structures unit. Shares later settled to an 11.3% gain as of 11:25 a.m. EDT today.

So what

Triumph shares have lost more than 60% of their value over the last five years as the company, a rollup of dozens of aerospace component businesses, has been weighed down by high costs and sluggish growth. CEO Daniel J. Crowley was appointed in January 2016 with a mandate to simply operations and boost profitability, and during his tenure he has consolidated operations and divested some of its poorer performing units.

A Triumph-made wing assembly.

A Triumph-made wing assembly. Image source: Triumph Group.

The aerospace structures unit, which manufactures aircraft composite and metallic wing assemblies and fuselages for a range of customers, has been a consistent drag. Triumph said selling the unit would allow it to reduce debt and focus on a core portfolio of interiors, systems, and aftermarket supplies.

"Aerospace structures has made significant operational improvements over the last several years while updating its mix of programs and sites to reduce risk to both customers and Triumph shareholders," Crowley said in a statement. "These actions expand the option set for aerospace structures' future as their dedicated employees and suppliers continue to deliver on customer commitments and field new technologies and automation to enhance their competitiveness."

Now what

A sale of the aerospace structures business would be a major step in reducing the risk in Triumph's portfolio, and the remaining businesses are solidly profitable. But the company will still need to demonstrate it can generate consistent growth and free cash flow from the revised portfolio.

Even after the Friday jump, Triumph shares are inexpensive, trading at 0.4 times sales, compared with industry leader TransDigm's 6.5-times sales multiple. But it is late in the cycle to be chasing a turnaround story. Be careful chasing Triumph as it climbs.

Lou Whiteman owns shares of TransDigm Group. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.

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