Triumph Group Downgraded to Underperform at BofA Amid ‘Production Uncertainty’

Bank of America has significantly downgraded Triumph Group, shifting its rating from Buy to Underperform due to concerns about the company’s dependency on inconsistent production rates from Boeing and Airbus.

Despite Triumph’s efforts to streamline and refine its business model, analysts from Bank of America express worries that these advancements are being overshadowed by erratic aircraft production timelines. Specifically, the company’s 737 Installations segment is functioning at a production rate of 13 aircraft per month, which is considerably lower than the level needed for margin improvement.

On a more positive note, the Composites and Cabin Components divisions are reportedly producing at a healthier rate of 30 aircraft per month. However, analysts highlight potential risks stemming from the inconsistent production rates across different segments.

Furthermore, the possibility of a prolonged strike at Boeing is seen as a potential trigger for inventory destocking, which could worsen existing challenges. Alongside production uncertainties, Bank of America also raised alarms about Triumph’s free cash flow (FCF) generation.

As the company increases production, and while Boeing and Airbus are accepting inventory, the analysts caution that possible production cuts could lead to heightened cash burn from destocking. Other challenges affecting free cash flow include the winding down of the V-22 program, delays from original equipment manufacturers, inflation, and supply chain disruptions.

Although Triumph’s aftermarket business is performing well, largely due to extended aircraft service life and overhauls of 787 landing gear, it only constitutes 20% of total sales. Bank of America views this as inadequate to mitigate short-term challenges, especially since the company’s margins have remained flat despite notable revenue growth.

As Triumph continues to restructure its portfolio and balance sheet, it is anticipated that the board might explore strategic options, including potential mergers and acquisitions. However, analysts suggest that any significant advancements are unlikely until the company achieves its year-end debt targets. In light of these factors, Bank of America has reduced its price target for Triumph Group from $17 to $12.