We maintain our Neutral recommendation on Allegheny Technologies Inc. (ATI), a diversified specialty materials producer. Allegheny Technologies reported strong earnings of $0.63 per share in the third quarter of 2011, exceeding the Zacks Consensus Estimate of $0.61 and last year's $0.01. Results were driven by increased shipments for most high-value products, higher raw material surcharges and increases in average base selling prices for many products.
Allegheny now expects 2011 revenue to be $5.2 billion compared with its previous guidance of $5.4 to $5.5 billion. However, Allegheny has been battling cost-pressures associated with high raw material costs by implementing price hikes through surcharges. The company also expects to continue benefiting from its new alloys and products, diversified global growth markets and differentiated product mix.
Allegheny is in the process of finishing several self-funded capital projects, some of which have already been completed, to help augment organic growth and its cost structure. The company started foundation construction at its Flat-Rolled Products segment, containing Hot-Rolling and Processing Facility. This project is expected to be completed by the end of 2013, and capital expenditure in 2011 is expected to be approximately $275 to $300 million. The Rowley facility is also making good progress with the standard grade qualification program while expecting start-up and qualification costs to decline further in the fourth quarter of 2011. The company anticipates completing the standard qualification process by the end of the first quarter of 2012.
Allegheny continues to improve its cost structure with nearly $29 million in gross cost reductions in the third quarter of 2011, bringing the year-to-date total gross cost reductions to over $87 million. Further, the company expects to exceed its 2011 gross cost reduction goal of $100 million. The balance sheet remains strong with cash on-hand of over $430 million and net debt to total capitalization of about 30% at the end of September 30, 2011.
However, Allegheny remains concerned regarding the U.S. and European economies and believes the continued high unemployment levels will negatively impact its short-term consumer and business confidence. Demand for the company’s standard stainless products is also negatively impacted by rapidly falling raw material surcharges resulting in customers delaying purchases and managing inventory levels. In addition, these factors appear to be influencing short-term demand for some high-value products from some of the key end-markets as many customers are cautious and are keeping inventories lean. As a result of these factors, the company now expects 2011 revenues of approximately $5.2 billion and segment operating profit as a percent of revenues.
Allegheny Technologies, based in Pittsburgh, Pennsylvania, produces and sells specialty metals worldwide. The company’s primary competitor is Carpenter Technology Corp. (CRS). The company currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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