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Investing.com -- Bank of America (NYSE:BAC) double-downgraded Triumph Group (NYSE:TGI) to Underperform from Buy, citing concerns about the company's reliance on uncertain production rates from Boeing (NYSE:BA) and Airbus.
While TGI has made strides in transforming its business into a leaner and more focused portfolio, BofA analysts expressed concerns that these positive changes are being overshadowed by unpredictable aircraft production schedules.
"As it pertains to the 737, the Installations segment is producing at rate 13/mo (far below the rate required for margin expansion)," said BofA.
Meanwhile, the Composites and Cabin Components divisions are said to be producing at a healthier 30 aircraft per month, but the analysts see further downside risks due to the uneven rates.
The bank adds that a prolonged strike at Boeing could lead to destocking, compounding existing challenges.
In addition to production uncertainty, BofA raised concerns about Triumph's free cash flow (FCF) generation.
The company is ramping up production, and while Boeing and Airbus are currently accepting inventory, Bofa says potential production cuts could exacerbate cash burn through destocking.
The bank states that other FCF headwinds include the sunsetting of the V-22 program, OEM deferrals, inflation, and supply chain shortages.
Although Triumph's aftermarket business is showing strength due to extended service life for aircraft and 787 landing gear overhauls, it accounts for just 20% of total sales.
BofA sees this as insufficient to offset near-term headwinds, especially as the company's margins remain flat despite strong top-line growth.
As Triumph continues its portfolio reshaping and balance sheet restructuring, BofA expects the board to consider strategic alternatives, including potential mergers and acquisitions.
However, the analysts believe that any meaningful progress will likely occur once the company reaches its year-end debt target. BofA lowered its price target for Triumph to $12 from $17.
