We are maintaining our Neutral recommendation on Triumph Group Inc. (TGI).

We are optimistic on the recent International Air Transport Association (IATA) traffic update for April 2012, which registered a 6.1% year-over-year growth in commercial transport passenger. Such a traffic pattern is expected to significantly accelerate maintenance spending on aircrafts and ramp up the aftermarket services growth for Triumph in the coming quarters.

However, the cargo market continues to show weakness, shrinking 4.2% in April, the weakest region being North America. Also, demand for aftermarket parts and services, as well as freight services in China remain hesitant. The cyclical commercial aerospace market showed a pull back in Europe, followed by North America.

During the fourth quarter of 2012, Triumph’s net sales inched up 3% year over year to $946.4 million, with organic growth reaching 3%. The results were attributable to improved execution and synergy realization. Moreover, margin improvement backed by expense cutback was impressive during the quarter. Management expects an increase of 9% to 11% in earnings per share from continuing operations for fiscal 2013 compared to fiscal 2012.

However, we are still concerned about the company’s repair and overhaul services, which are exposed to risks, including having only a few large clients, interest rate changes and problems in supply chain management. Moreover, demand for military and defense products has shown a slowdown over the last few quarter on account of squeezed government budgets.

Offsetting the above risks, Triumph witnessed strong demand for the company’s new age jet engines with fuel efficiency, reduced noise level and exhaust emission capabilities. Stronger demand was also noticed across business and general aviation aftermarket parts and services. Leveraging such rising demand scenario, Triumph Group is expected to boost sales in the coming quarter, thereby retaining shareholder confidence on the stock.

The aerospace industry is highly competitive due to an adverse situation of overcapacity. The company directly competes with peers such as AAR Corp (AIR), Lockheed Martin Corporation (LMT) and Spirit Aero Systems Holdings Inc (SPR). Moreover, higher energy and commodity costsprovoke a risk of margin contraction.

Triumph Group has a Zacks #2 Rank, which translates into a short-term (1-3 months) Buy rating.

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