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.