Triumph Group: A Small-Cap Defense Name with Two-Way Potential
Overview of Triumph Group
For investors scouting for a small-cap aerospace and defense name with considerable potential, Triumph Group (TGI) emerges as a notable candidate. Based in Radnor, Pennsylvania, Triumph Group specializes in the design, engineering, manufacturing, repair, and overhaul of a wide array of aerospace and defense systems, subsystems, components, and structures. The company primarily caters to the global aviation industry, which encompasses both military and commercial operators throughout the lifecycle of aircraft.
Triumph operates through two main segments: Triumph Systems & Support and Triumph Interiors. The Systems & Support segment is focused on the design, development, and servicing of proprietary parts and systems, in addition to producing complex assemblies for various aircraft. Meanwhile, Triumph Interiors provides insulation and interior components, including composite elements related to environmental control ducting, serving military and commercial manufacturers alike.
Key Customers
Triumph’s clientele includes a spectrum of notable names in the industry, such as FedEx (FDX), United Parcel Service (UPS), Boeing (BA), Airbus (EADSY), Lockheed Martin (LMT), Northrop Grumman (NOC), GE Aerospace (GE), Rolls-Royce (RYCEY), the Pratt & Whitney unit of RTX (RTX), and Honeywell (HON).
Recent Downgrades and Market Concerns
Recently, Triumph Group faced a significant downgrade by Bank of America‘s Ronald Epstein, who lowered the stock’s rating from “buy” to “underperform” and cut the target price from $17 to $12. Epstein, who boasts a five-star rating on TipRanks and is viewed as a top-3% analyst, expressed concerns about the company’s production capacity. He noted that while Triumph is currently ramping up production and the inventory is being accepted by Boeing and Airbus, future production cuts could lead to a problematic destocking situation, especially given the current labor strikes affecting Boeing and the sporadic supply chain issues plaguing Airbus.
Triumph was previously downgraded by five-star analysts from JP Morgan and Truist Financial in August, further heightening investor caution.
Financial Overview: Earnings and Fundamentals
Triumph Group is on the brink of reporting earnings in about five weeks, with Wall Street estimating an adjusted EPS of $0.01 on revenue of $283 million. This forecast reflects a considerable change compared to the year-ago quarter, which recorded an adjusted EPS of $-0.05 and a revenue decline of 20%. Notably, all nine analysts monitoring Triumph have adjusted their estimates downward since the quarter commenced.
As of June, Triumph has demonstrated substantial negative cash flow, reporting an operating cash flow of $-31.4 million and free cash flow of $-55 million. This alarming trend indicates that cash is not currently being returned to shareholders. Looking at the balance sheet, Triumph had $152.6 million in cash and $358.7 million in inventories, leading to total current assets of $749.8 million. With current liabilities amounting to $303.2 million and no short-term debt, the firm’s current and quick ratios stand at 2.47 and 1.29, respectively, which is commendable but raises questions given the overall financial landscape.
Triumph’s total assets reach $1.493 billion, including $573.5 million in goodwill and other intangibles, comprising 38% of total assets. While this figure is on the upper end of a healthy metric, the total liabilities at $1.612 billion, inclusive of long-term debt of $947 million, present a troubling scenario for a company with current liquidity constraints.
Investor Sentiment and Short Position Potential
Despite the challenges, there is underlying potential within Triumph’s business model. However, the precarious relationship with Boeing introduces uncertainty, making the outlook ambiguous in the long run. Unless the company can pivot its cash flow dynamics, it may find itself in a precarious financial situation. Interestingly, around 11.5% of the stock’s float is currently engaged in short positions, a figure that can trigger a short squeeze, albeit likely insufficient for sustained momentum.
Technical indicators suggest a bearish trend, as observed in the descending triangle formation and relative weakness in stock strength. The daily MACD also signals pessimism as evidenced by the recent “death cross” occurring in late September, suggesting that Triumph Group may be a candidate for short positions. For those considering entry into the fray, purchasing $12.50 puts, set to expire on January 17, could serve as a safer route compared to outright shorting the stock. This option requires the stock to trade below $11.35 by the expiration date to yield profitability.
Conclusion
While Triumph Group offers intriguing investment exposure within the aerospace and defense sector, its financial struggles and market uncertainties warrant caution. Investors should weigh the potential rewards against the inherent risks before proceeding.
