Shares of Triumph Group (NYSE: TGI) surged 13% higher on Friday after the aerospace supplier was mentioned as a potential takeover target. After years of underperformance, the company is slowly getting its act together, but investors need to be careful about getting too excited right now.
Triumph is a collection of aerospace component businesses that had fallen on hard times prior to the coronavirus pandemic, with its shares losing about 70% of their value from midyear 2013 to the end of 2019 due to profitability issues. The company appointed Daniel J. Crowley as CEO in 2016 with a mandate to simplify operations and improve profitability, and Triumph in the years since has made steady progress selling underperforming businesses.
The pandemic has complicated the turnaround, with airlines trimming flights and cutting back new plane purchases. That has been a blow to Triumph's business making parts for new Boeing (NYSE: BA) aircraft and selling spare parts to airlines.
But with many of the troubled businesses now no longer a part of Triumph, some in the industry believe the company could be a target for a larger supplier. The shares are up on Friday following an article on the website Dealreporter that four sector advisors believe that with Triumph now out of the low-margin aerostructures business, it could be a takeover target.
An eventual sale has always seemed the most likely outcome of Crowley's tenure, so talk of a deal is no surprise, although it's always hard to predict the timing of an acquisition.
Whispers about a potential deal have been circulating for weeks, and Triumph shares are up more than 50% since Sept. 10. There might be something to the talk, but investors need to be cautious here.
Even if the rumors of potential interest are true, there is no guarantee they will lead to a transaction. Buying stocks based on merger rumors is speculating, not investing, and is best avoided.
Triumph is inexpensive, trading at just 0.16 times sales even after the stock's surge. But there's good reason for that discount: It was a troubled company going through an extensive turnaround even before COVID-19 hit, and its core commercial aerospace business is going to need time to recover from the pandemic.
My advice is to ignore the deal talk, and focus on better-positioned companies if you are interested in investing in a commercial aerospace recovery. Triumph on its own is heading in the right direction, but it is going to take a long time to get to its destination.
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