Date: May 1, 2013 Price: 26.02 Mkt. Cap.: 2.8 billion
We recommend purchase of the shares of Allegheny Technologies (ATI). ATI deserves enormous credit for wisely reinvesting in its basic business despite fluctuating earnings. Too many U.S. industrial companies have increased dividends, made mistimed stock buybacks, or completed silly acquisitions. ATI is nearing the end of a long capital investment cycle that will leave it well positioned for future growth and sustained profitability. Highly cyclical companies like ATI are notoriously difficult to understand, value, and predict. However, it has been our experience that investors with patience and courage can profit from owning the shares of volatile companies that are competently executing a solid long-term strategic plan.
We will give an overview of ATI’s business, make an attempt at valuation, and finally discuss some of the “timing” issues involved in our recommendation
ATI is a difficult company to understand. It is in part a producer of many highly specialized steel alloys that have very interesting growth prospects, and above average profitability profiles. These products include titanium alloys that have increasing importance in the manufacturing of commercial jet airframes and jet engines. However ATI is also a large producer of stainless steel products that are closer to what one could call “commodity” grade and cannot really be considered a specialty product. Stainless steel adds certain alloys (mainly nickel, but many other are used) to prevent corrosion and rust. Growth in these products in highly dependent on economic growth, and competition is higher, and profitability is lower and much more volatile.
The slide below is borrowed from ATI’s 2012 annual report.
Some important things to note:
79% of sales are high-vaue products, only 21% is commodity grade
potential growth areas like aerospace and oil/gas are 51% of sales
the remainder is widely diversified, withonly an 8% exposure to the cyclical automotive business