Boeing (NYSE:BA) and its supply chain have been hit hard by the March 2019 grounding of the 737 MAX, which makes up a substantial portion of the aerospace giant's order book and supports an array of suppliers.
Two years removed from the first fatal accident involving the 737 MAX, it appears the plane is nearing regulatory approval to fly again.
Investors have taken notice. Shares of one particularly hard-hit supplier, Triumph Group (NYSE:TGI), are up 12% at midday Thursday on growing optimism about the 737 MAX's return to service, and persistent merger rumors surrounding the company.
The 737 MAX's grounding has reverberated through Boeing's supply chain, and with airlines in recent months cutting flying due to the coronavirus pandemic, the plane is unlikely to be a fast-seller even after it receives regulatory clearance. Boeing had once hoped to be manufacturing at least 55 MAX jets per month by now. Instead, the company will likely make fewer than 80 this year, and hopes to gradually rebuild production to 31 planes per month by 2022.
Triumph was in the middle of a long-term restructuring project even before the 737 MAX issues, but the grounding hit the supplier hard. Moody's in January estimated the 737 MAX accounted for upwards of 8% of the company's $2.8 billion in annual revenue.
The company is working to pay down a substantial debt load, and needs whatever revenue the 737 MAX can provide to help fund it through its restructuring. Even with Thursday's rally, shares of Triumph are off 71% for the year, far worse than Boeing's 48% decline.
Triumph shares have also been the subject of merger speculation. Last month, the website Dealreporter said sector advisors believe that now that Triumph has sold its low-margin aerostructures unit, it could be an attractive takeover target.
There's good reason for investors to feel more optimistic about Triumph now than they did six months ago, but a lot of caution is still needed. Triumph shares have been beaten down for good reason, and the company, though slowly returning to health, is a long way off from being an outperformer. Given that commercial aerospace is likely to slump for years due to the pandemic, there are no quick fixes to get the business healthy.
Which is why the continued acquisition chatter is so intriguing. Many industry watchers (myself included) have always thought that the end result of Triumph's restructuring could be a sale of the company. But it is uncertain whether potential buyers like TransDigm Group (NYSE:TDG) would be willing to commit the nearly $2 billion needed to buy out the shares at a premium and assume Triumph's debt, especially in this difficult operating environment.
It's hard to predict M&A, and I won't try. But for long-term investors, my advice is to look past Triumph and focus on better-positioned companies if you want to invest in an eventual aerospace recovery.