Triumph Group Continues To Fly High

Interested in a mid-cap that continues to fly high? Look no further than Pennsylvania-based Triumph Group (NYSE:TGI), a manufacturer of aircraft parts, components and assemblies. Trading at a low of $15.63 in March 2009, it closed above $63 on February 2. Despite a 305% increase in less than three years, it looks like its stock should soar even higher.

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The maker of fuselages, wings, tail assemblies and helicopter cabins got its start all the way back in 1917. Benefiting from the growth in aviation, Vought's annual revenues today are approximately $1.9 billion with operating income of around $161 million. In March 2010, Triumph Group agreed to buy Vought from the Carlyle Group for 7.5 million shares, $548 million in cash and the assumption of $603 million in debt.

The $1.6 billion deal changed Triumph overnight. No longer a small player in the aviation business, its revenue ended March 31, 2012, should be between $3.35 and $3.40 billion with diluted earnings per share from continuing operations of $4.70 excluding any integration costs from the Vought acquisition. Once owned by Northrop Grumman (NYSE:NOC), this is the second time Carlyle has sold the company. After the acquisition, Carlyle owned 31% of Triumph. Today, their ownership is down to 6.5%. This is one of those rare instances where both parties got a good deal. (For related reading, see The Merger- What To Do When Companies Converge.)

On the surface, its 2% revenue increase to $826 million doesn't seem all that great. However, if you exclude declines in nonrecurring revenue and its 787 program, the increase is actually 5%. If it can increase revenue by at least 2% or more each quarter for the foreseeable future, its ability to find cost reductions and efficiencies will translate into healthy profit growth.

In the third quarter, its operating income increased 36% or $117.6 million on the back of a healthy 14% operating margin. At the same time, its earnings-per-share increased 44% to $1.27 a share. Flash forward to its fiscal 2013 year-end next March. If it generates $3.6 billion in revenue, which is about 2% per quarter, a 14% operating margin translates into diluted earnings per share of $5.34, which is a forward P/E of 11.9. From a P/E perspective, it's cheaper than it's been since 2009.

Triumph Group and Peers

Triumph Group generated $85 million in free cash flow in the first three quarters of fiscal 2012, which is an 85% increase year-over-year. As a result, it's been able to reduce its net debt by $93 million to $1.18 billion. More importantly, its net debt-to-capital ratio is now 39.5%, 430 basis points lower than at the end of March. I'm not suggesting that it make another acquisition while still swallowing Vought; however, its financial position is sufficiently strong that should another game changer come along, it should definitely pounce. (For related reading, see Free Cash Flow: Free, But Not Always Easy.)

Up until January 2006, Triumph Group's stock had traded below $20 for an entire decade before busting out above $40, only to fall back below $20 in late 2008. It's a long way to come in such a short period of time. For a dose of conviction, you need look no further than the Homestead Small Company Fund (HSCSX). The Triumph Group is the five-star fund's number one holding at 4.2% of the fund's assets. With a 4% turnover rate, you can be sure they see a bright future for Triumph.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.