Shares of Triumph Group (NYSE: TGI) surged 13% higher on Friday on rumors the aerospace supplier could be a takeover target. But the stock came back down to earth on Monday, declining 21% as of 1 p.m. EST.
Triumph has been a tough business to love over the years. The stock lost about 70% of its value from midyear 2013 to the end of 2019 due to profitability issues. CEO Daniel J. Crowley was hired in 2016 with a plan to simply operations, shed underperforming units, and improve profitability. And while he has made progress, it is a multiyear challenge.
Investors on Friday got excited by reports that Triumph has done enough to get it on the radar of potential suitors. An article on the website Dealreporter said that four sector advisors believe that with Triumph now out of the low-margin aerostructures business, it could be a takeover target.
On Monday, the shares were falling back as investors consider how difficult it will be to get a deal done in the current environment. The coronavirus has caused airlines to cut flights and reduce costs, trimming demand for new planes and spare parts.
Most of the potential buyers, companies including TransDigm Group, Woodward, Curtiss-Wright, and Moog, have their own issues to deal with right now due to the pandemic. Woodward, in fact, called off a $6 billion merger in April due to uncertainty.
I urged caution as Triumph shares were soaring higher on Friday, noting there is a huge difference between mergers and acquisitions rumors and an actual deal announcement. Triumph is cheap for a reason, and given the difficulties commercial aerospace faces due to the pandemic, it is hard to imagine anyone paying up to take on a turnaround in this environment.
That said, I and a lot of other industry watchers have long assumed Triumph's turnaround story would end with the company being sold. Crowley has done a lot of good work rehabbing the business, and I would not rule out someone being interested, depending on the price. There could be a deal announced tomorrow, next week, next month, or next year. Truth is, we don't know, and with that much uncertainty, it's unwise to buy or sell the stock based on the reports.
The advice on the way down is no different than the advice provided on Friday when the stock was up: Ignore merger speculation and focus on better-positioned companies if you want to invest in commercial aerospace right now. Triumph management deserves a lot of credit for what it has done, but this remains a work in progress trying to navigate a very difficult market.
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