GR Goodrich Corp. (The)

We reiterate our Neutral recommendation on Triumph Group Inc. (TGI).

The recent rebound in commercial air traffic is anticipated to intensify demand growth for new Aerostructures products, equipment and services related to repair and overhaul. On such a scenario, aerospace players like Triumph Group are certain to benefit from increased demand for new age jet engines, which are fuel efficient and equipped with reduced noise levels and exhaust emissions.

Triumph Group recorded improved results in the second quarter of 2012 driven by significant operating income growth coupled with operating margin expansion, especially in Aerospace Systems and Aerostructures. The segmental growth resulted from the company’s commendable execution in all its businesses. We believe that the company’s continued focus on execution and the cost control programs will reinforce its top line, going forward.

However, demand for military and defense products is largely dependent upon government budgets, particularly the U.S. defense budget. Therefore, a cut in defense spending or levels of military flight operations could curtail its prospects in this market, affecting the company’s financial results. Nonetheless, the geopolitical security issues, higher energy costs and currency fluctuations could also limit Triumph’s business and profitability for the quarters ahead.

Triumph operates in a cyclical commercial aerospace market, which contains significant downturn risk. The adverse situation of an overcapacity in the market may contract margins. Moreover, the company’s aftermarket sales like repair and overhaul services are also exposed to the risk of third party payments.

Mention may also be made of Triumph’s dependence on a few large customers, due to which the company may fall pray to the decline in financial conditions of its clients during turbulent times. The company’s exposure to competition from big and small industry players, remain a cause of concern.

Challenging the above threats to profitability, the company holds a favorable outlook for fiscal 2012, expecting to enhance its current revenue stream and EPS. The company remains committed toward paying dividends to its shareholders and recently announced a public offering. The strategy of asset acquisition of a leading provider of repair and refurbishment of aircraft interiors, appear accretive in the upcoming financials.

Based in Wayne, Pennsylvania, Triumph Group offers a variety of products and services to the aerospace industry. The company serves commercial and regional airlines, air cargo carriers, as well as OEMs of commercial, regional, business and military aircrafts. It faces stiff competition from its peers, such as AAR Corp. (AIR) and Goodrich Corp. (GR).

Triumph Group holds a Zacks #3 Rank, which translates into a short-term Hold rating (1-3 months).

 
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