Triumph (US: TGI) has been making parts for planes for decades. It supplies all the major aircraft manufacturers, including Boeing and Airbus, and has lucrative service contracts with them and the big airlines, too. Yet its share rating is much lower than similar companies. But, with a renewed appetite for acquisitions and organic earnings growing fast, that gap is set to close.
- Effect of $1.4bn Vought acquisition
- Key deal in aerospace systems division
- Solid third-quarter results
- Analysts raising profit forecasts
- Military budget cuts
- Heavy exposure to Boeing
Last month's third-quarter results reveal why. Sales in the three months to 31 December grew 8 per cent to $891m (£575m), but an increase in profit margins meant adjusted earnings rose 13 per cent to $1.46 a share, easily beating analysts' forecasts. Already this financial year, Triumph has made a net profit of $236m, or $4.52 a share, and rising production and a lower tax rate should generate better-than-expected annual earnings of $6.05 a share, it says.
It hasn't always been this way. Until 1993, Triumph was a collection of aircraft businesses rattling around a conglomerate, Alco Standard Corporation. Then management teamed up with private equity in 1993 and bought the business. The following year Triumph made sales of $130m. This year it will be at least $3.65bn and nudging $4bn in 2014, according to analysts.
Much is to do with Triumph's aggressive acquisition policy - it has bought more than 40 aerospace companies since floating in 1996. Easily the most important was the $1.4bn purchase of Vought Aircraft Industries in 2010. Revenue more than doubled and made Triumph a top-tier supplier. Its share price has doubled since, too, and cost savings will soon be running at $50m a year.
After a two-year hiatus, new chief executive Jeff Frisby made his first deal in December and snapped up metal finishing firm Embee. That will add $50m to sales and immediately benefit earnings. But buying Goodrich's pump and engine-control systems (GPECS) division a month later is more significant.
TRIUMPH GROUP (US:TGI) | ||||
|---|---|---|---|---|
| ORD PRICE: | $73.35 | MARKET VALUE: | $3.67bn | |
| TOUCH: | $73.29-$73.35 | 12-MONTH HIGH/LOW: | $73.69 | $53.46 |
| DIVIDEND YIELD: | 0.2% | PE RATIO: | 10 | |
| NET ASSET VALUE: | $40.50 | NET DEBT: | 65% | |
| Year to 31 Mar | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share ($) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 1.29 | 126 | 2.06 | 8 |
| 2011 | 2.91 | 234 | 3.33 | 8 |
| 2012 | 3.41 | 438 | 5.75 | 14 |
| 2013* | 3.68 | 494 | 6.49 | 14 |
| 2014* | 3.97 | 590 | 7.59 | 14 |
| % change | +8 | +19 | +17 | nil |
Beta:1.1 *Goldman Sachs forecasts £1=$1.57 | ||||
GPECS will generate $195m of annual revenue and extra earnings, too. Importantly, it opens doors to the big engine makers and the US Army. That will will beef up Triumph's Aerospace Systems division, which has been overshadowed since the Vought deal by the group's Aerostructure unit, where three-quarters of group sales are made. Aerostructure's margins are superior, too - a better-than-expected 17.4 per cent last quarter and tipped to hit 20 per cent soon.
That has much to do with Boeing. It has put $1.35bn of business Triumph's way in the past nine months - about half of net sales. Of course, Boeing is ramping up production of the 737, 777 and 787 airliners, all of which use Triumph parts. However, relying on a single customer for that much work is not ideal, neatly illustrated by the recent grounding of the 787 fleet. Thankfully, there has been no impact on production, and Triumph supplies all Boeing's major programmes and Airbus, too, including the A320, A380 super-jumbo and 787 rival, the A350.
In fact, commercial aerospace accounts for about 57 per cent of Triumph's sales, and business jets 12 per cent. It is expected to win more business with Boeing, too. However, military programmes - such as the C-17 and C-130 military transporters, and Blackhawk helicopters - account for more than a quarter of sales and all are slowing down. Boeing's 747-8 freighter, for which Triumph makes doors and fuselage panels is selling badly, too. That said, a lot of caution is already baked into forecasts and expectations elsewhere are high.
Indeed, analysts at investment bank Goldman Sachs think Triumph's bosses are too cautious and expect fully-diluted fourth-quarter EPS of $1.63, making $6.14 for the year. That puts the shares on less than 12 times earnings, dropping to just 10 times for 2013-14, a 20 per cent discount to peers. Besides, following an investor day, due on 20 February, we wouldn't bet against another earnings upgrade before final results in May.
