Allegheny Technologies (ATI), which makes high performance metals, is trading lower (-8%) today after it guided Q1 EPS well below market expectations last night. ATI expects Q1 EPS of just $0.10-0.13, which is about half of what was expected. Revenue in Q1 is expected to be around $1.0 bln, which is roughly in-line. ATI will announce full Q1 results on April 23 before the open.
So, what is going on? ATI says that it faced unexpected operational headwinds in both of its business segments in Q1. Specifically, in the High Performance Materials and Components (HPMC) segment, the company cited a greater than expected disruption in third party nickel powder billet supply, as well as higher operating costs due to its accelerated ramp of nickel powder production and temporary margin compression caused by a rapid drop from prior months' cobalt prices, for below expectations results.
In its Flat Rolled Products (FRP) segment, the STAL joint venture experienced lower than anticipated demand in China, including continued softness in the high-end consumer electronics market, which drove an extended production downtime around the Lunar New Year holiday period. This lower demand, coupled with increased operating costs for the joint venture's newly expanded production facilities, resulted in lower than expected profitability in Q1. In addition, ATI's US Flat Rolled business faced weaker than expected demand for commodity stainless products due to customer inventory destocking actions.
The company's largest market is aerospace and defense, which represents about half of total sales, led by products for jet engines. Additionally, ATI has a strong presence in the oil and gas, electrical energy, medical, and automotive markets. In aggregate, these key markets represent about 80% of revenue.
The guidance is not all bad news. ATI does expect these headwinds to ease in Q2, and they are not expected to have any impact in 2H19. Also, ATI is working with customers to address current supply constraints related to the ongoing aerospace production ramp.
ATI also addressed the issue with Boeing (BA), since aerospace is such a big market for ATI. Basically, ATI says that it has full confidence in Boeing's ability to address the current 737 MAX issues, and as previously announced, ATI expects to maintain its current production and delivery schedules related to that aircraft. Accordingly, ATI's financial results are expected to improve in Q2 and throughout the balance of 2019.
In sum, ATI appears to have had a difficult Q1. We would be cautious on other aerospace suppliers this earnings season. Names to watch include AA, ARNC, COL, GE, SPR, TDG, TGI, UTX, and WWD. The good news is that these issues should abate somewhat in Q2 and not be an issue thereafter.