Triumph Group To Benefit From Airline Industry Drivers

HM is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Triumph Group (NYSE: TGI) is involved in designing and manufacturing products and providing services to the military as well as commercial aviation industry. Its main business segments include aero-structures, aerospace systems and aftermarket services. In the past few quarters, the company's EPS as well as revenue has been increasing, and there are several business and market drivers that will help this company register stronger gains in the coming quarters as well.

Key business drivers

In its February investors presentation, Triumph Group said that it sees a pipeline of almost $2 billion in key opportunities in the near future, and its plane operations business as well as aftermarkets business was gaining market share. 

Triumph Group's acquisitions are playing an important role in driving growth. Its acquisition of Vought Aircraft in 2010 helped the company enter the growing aero-structures segment. Triumph Group also recently bought Goodrich pump/engine control systems business from United Technologies, which is set to contribute almost $200 million in additional sales in the next year. These acquisitions in growing lines of business have helped Triumph Group position itself as a major player in the airline industry.

Key market drivers

The airline industry suffered major setbacks soon after the 2008 financial crisis. Commercial aviation business took a hit because air traffic volumes decreased as overall economic activity slowed down. But in the past two years, the industry is recovering. According to the International Air Transport Association, airline businesses will profit from increased air traffic, improved economic activity, higher margins and better utilization rates. Companies like Triumph Group will benefit from this as airliners will be encouraged or even required to order more products and services.

Another important market driver that could work in favor of Triumph Group is the aging fleet size. Safety regulations in developed countries require overhaul of aging aircraft fleets, resulting in greater demand of aero-structures and other aircraft systems. Also in the developing or third-world countries where the aviation business is in the process of expanding, fleet expansion amidst airlines is set to continue to meet passenger demands.

These businesses as well as market drivers will benefit all the business segments of Triumph Group.

Key Statistics -- Valuation Ratios, Earnings, Cash Flows

Triumph Group currently sells at a discount considering that its Price/Earnings-to-growth or PEG ratio is only 0.6 and trailing twelve months' Price-Earnings multiple of 12 is lesser than sub-industry mean of 16.

The company has seen an increase in sales at a solid CAGR of more than 20% in the past five years.

The company also enjoys stronger margins compared to its peers. Its operating margin is 26% and net margin is 9%, while sub-industry mean numbers are 16% and 7%, respectively. Along with revenues, earnings are on the rise as well. Their Earnings-Per-Share or EPS has been improving year-over-year since 2010 (see EPS graph below).

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Competitive landscape

Triumph Group's competitors in the aftermarket and aerospace systems segment include United Technologies (NYSE: UTX) and Textron (NYSE: TXT).

United Technologies is an industrial conglomerate with a strong brand portfolio that includes names like Pratt & Whitney (engines), Sikorsky (helicopters), Otis (elevators), and Carrier (air conditioners). Its aerospace systems segment (14% of total 2012 sales came from this segment) was expanded after the 2012 acquisition of Goodrich, making United Technologies a big worldwide supplier of high-tech aerospace products and aftermarket systems.

Textron makes Cessna jets (25% in 2012 sales came from Cessna segment) as well as Bell helicopters (35% in 2012 sales came from Bell segment), and also manufactures military equipments such as unmanned aircraft systems.

There are other companies competing with Triumph Group in specific business segments such as aircraft parts, services or composites used for aerostructures -- these companies include Heico Corp, Hexcel Corp and Precision Castparts. Heico makes jet engine replacement parts and provides aircraft engine services as well, but is heavily dependent on the U.S. defense spending. Hexcel Corp is in the business of making advanced aerospace composites for both military as well as commercial applications. Precision Castparts is an indirect competitor of Triumph Group - it makes complex metal components that are used in the making of jet engines, along with other applications in the industrial and energy sector.

Of all these companies, Triumph Group stands out with a 29.45% five-year EPS growth, and the lowest PEG ratio (0.85, as compared to United Technologies' PEG of 1.28, Textron's 0.9 and Precision Castparts' 1.38), and with the best compounded annual growth rate.  With recent acquisitions, Triumph Group has positioned itself very well for the growth that is expected in the aerospace industry.

Good opportunity

Triumph Group appears to be a good opportunity in the long run. However, as with any other investment, there are risks as well -- for example, the U.S. defense budget cuts would impact the company's military craft business. Also another risk to consider is the possibility of any slowdown in the global economy that could result in reduced GDP output.

Triumph Group is a profitable company with proven track record of improving margins, earnings and sales, and more importantly, the company has provided positive outlook for the coming year. There are important business and market drivers that are poised to act as catalysts for this company. With the S&P 500 closer to record highs already, chasing Triumph Group at this price is probably not the best idea -- add this stock to your watch list and buy it on pullbacks in the stock price.

HM Joshi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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