Zacks_Analysts' Blog : TGI Downgraded to Neutral - Analyst Blog

We recently downgraded our recommendation on Triumph Group Inc. (TGI) from Outperform to Neutral.

The downgraded rating is backed by cyclical commercial aerospace market in which the company operates. The overall aerospace market has shown significant downturns in the past and the company witnessed contracted margins in its OEM business due to overcapacity.

Furthermore, Triumph’s dependence on a few large customers like Boeing, accounting for 45.3% of sales in FY11, does not appear conducive for the company’s growth. Moreover, the company depends on third party repair and overhaul for aftermarket sales and hence exposed to the risk of third party payments and increased competition.

However, air transport industry has already started showing signs of improvements with the apprehension of rising demand for air transport, new products, equipment and methods of repair and overhaul services in the near future. This demand surging environment is anticipated to aid Triumph Group to uphold a satisfactory position in the industry.

Triumph Group bears a favorable outlook for fiscal 2012 and expects to enhance current production rates while boosting earnings per share. The company’s continued focus on execution and cash flow besides the cost control programs is expected to strengthen the company’s stock performance, thereby enhancing shareholder value going forward.

However, Triumph’smilitary and defense products, which are largely dependent on government budgets particularly the U.S. defense, are exposed to the risk of decrease in defense spending among the U.S and other governments. Moreover, geopolitical security issues, higher energy costs and currency fluctuations could curtail the prospects of Triumph’s business for the quarters ahead.

Of late, Triumph Group reported first-quarter 2012 financial results with earnings per diluted share of $1.00, showing an improvement from 66 cents in the year-ago comparable quarter. Net sales shot up 108% year over year to $845.1 million, with organic growth reaching roughly 13%.

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).