Triumph Stock: Contrarian Aerospace Play Can Stage Strong Rally

triumph stock
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Triumph Group: An Aerospace Player on Hard Times

The current investment climate is extremely difficult and frustrating to deal with, due to the prospects of trade wars, tariffs, and other factors that could suddenly surface. In the case of the small-cap Triumph Group Inc (NYSE:TGI), a maker of parts and solutions for the aerospace and defense sectors, TGI stock has underperformed.

Stuck at just below the midpoint of its 52-week range, Triumph stock is worth a look, especially if the company can halt its revenue decline and turn things around.

If TGI stock can hold support at just below $24.00, we could see a rally back toward the $30.00 resistance level, followed by a move toward $34.00.

Chart courtesy of StockCharts.com

Triumph makes and services aerostructures, aircraft components, accessories, subassemblies, and systems to clients including original equipment manufacturers (OEMs) worldwide.

From commercial aviation to military jets, Triumph seems like it can rally on the strong prospects in the aviation space in the U.S. and globally.

We see massive increases in military budgets in the United States and many other countries around the world. Spending is also strong in the commercial aviation segment. Triumph can benefit from the rising expenditures, which ultimately would reward investors in TGI stock, but there’s plenty of work to do.

Why TGI Stock Could Take Off if the Stars Align

Triumph has delivered lower revenues in three consecutive years, from $3.89 billion in FY15, to $3.88 billion in FY16, to $3.53 billion in FY17.

For FY18, revenues are expected to further decline by 11.3% to $3.14 billion before they finally rise to $3.2 billion and as high as $3.46 billion in FY19. (Source: “Triumph Group, Inc. (TGI),” Yahoo! Finance, last accessed April 2, 2018.)

While the revenue picture is not exactly breathtaking, an encouraging sign is the increase in gross profits and gross margins from FY16 to FY17.

Gross Margins

FY15 19.2%
FY16 7.4%
FY17 24.0%

Triumph made an adjusted $4.52 per diluted share in FY17, but this is expected to decline to $2.49 per diluted share in FY18, prior to rising to as high as $3.10 per diluted share in FY19.

In addition to its revenue and earnings, Triumph is burdened by excessive debt of $1.37 billion. The carrying charges could impact the company’s financial flexibility, but TGI has managed to produce free cash flow of about $238.0 million over the past four quarters. This is key as Triumph works on dealing with its growth.

Analyst Take

Triumph stock could rally if the company can offer some optimism to investors. Should TGI stock begin to rally, the buying would be supported by a relatively large short position of 20.2% of the float.

Trading at 9.3-times its FY19 earnings per share (EPS), TGI stock looks attractive. But, unless it rectifies its revenue and earnings growth, Triumph could prove to be a value trap.

On the other hand, if Triumph can reverse course and right the ship, I wouldn’t be surprised to see TGI stock rally at least 50%.