Allegheny Tech trades lower on Q3 results; aerospace is a nice tailwind, but EPS was light (ATI)

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Last Update: 23-Oct-18 08:35 ET

Allegheny Technologies (ATI 24.93, -1.89, -7.05%) is trading lower today after reporting Q3 results this morning.

ATI is major supplier of high-performance metals, including titanium and titanium alloys, nickel-based alloys, and specialty steels. It also sells specialty stainless sheet, stainless steel sheet, and stainless steel plate. ATI produces advanced alloys that combine qualities such as superior strength-to-weight ratio, elevated temperature resistance, low coefficient of thermal expansion, and extreme corrosion resistance that improve qualities such as efficiency and longevity for use in various applications. Its capabilities range from alloy development to final production of highly engineered finished components.

The company’s largest market is aerospace and defense, representing a major portion of the company’s 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, business in these markets contribute about 80% of revenue.

ATI operates in two business segments: High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Growth in the HPMC segment, under which aerospace and defense sales are reported, has been largely driven by increasing demand for commercial aerospace products. This is expected to drive HPMC and overall ATI results for the next several years due to the ongoing expansion in production of next generation jet engines and airplanes.

Turning to the Q3 results, ATI reported that non-GAAP EPS jumped to $0.37, up from a $(0.07) loss in the prior year period. Revenue rose 17.4% year/year to $1.02 bln. EPS was a bit below market expectations while revenue saw some slight upside.

The aerospace and defense markets continue to drive results in its HPMC segment. Segment sales were up significantly versus the prior year but declined sequentially due to normal seasonality as well as to a nickel powder billet supply issue, which the company has previously noted. Sales of next-generation jet engine products continued to be strong, increasing by 42% year/year and representing 48% of Q3 HPMC jet engine product sales. Its FRP segment had what ATI described as another solid quarter.

Looking ahead, while ATI does not provide specific guidance, it does say that in its HPMC segment, ATI remains confident in its customers' elevated order patterns due to increasing jet engine build rates over the next several years. However, in the FRP segment, significant price declines in several key raw materials are expected to result in weaker Q4 results due to a short-term mismatch between input costs and the surcharge index pricing mechanism.

In sum, this was a bit of a disappointing quarter for ATI. After a slight EPS miss in 3Q17, ATI had posted three large back-to-back-to-back EPS beats. Today, they missed on EPS, albeit slightly. This result, coupled with a market sell-off at the open, put pressure on the stock in the pre-market and, during morning trade, pushed the stock below the lower end of the $24-30 trading range it has maintained for all of 2018.