Shares in aerospace and defense structures and components supplier Triumph Group (TGI -2.23%) soared by 99.5% in November, according to data provided by S&P Global Market Intelligence. The remarkable move comes in concert with two game-changing events that buoyed the aerospace sector in the month.
The first was the positive news flow on COVID-19 vaccines. The hope that a vaccine will accelerate the natural progress of herd immunity is seen as a major plus for the commercial aviation industry. That's great news for aerospace suppliers like Triumph.
The second event was news that the Federal Aviation Administration had rescinded the order grounding the Boeing 737 MAX. Triumph is a supplier on the 737 MAX and given the potential for long-term growth in production now that the grounding has been lifted, investors will start to pencil in some more positive earnings scenarios for Triumph.
The two positive pieces of news couldn't have come at a better time for Triumph. The company has $1.6 billion in net debt, a big number for a company that used up $253 million in cash in the first two quarters of its fiscal 2021. Indeed, credit rating agency Moody's downgraded its debt in the summer due to its view that Triumph's default risk was rising.
In this context the news about the vaccine and the 737 MAX is seen as significantly de-risking the stock, and that's why you can see big moves in the share prices of troubled Boeing suppliers like Triumph and Spirit AeroSystems. As an added demonstration of this phenomenon I've included a chart of Triumph's correlation with Boeing stock in the month -- it's very high.
It's going to be a long road back to normal for the commercial aviation industry and in particular for Triumph. That said, the first major tranche of its debt is $300 million due in 2022. Hopefully, by then, Triumph will be back to generating substantive earnings and free cash flow. That's something to look out for.