Titanium's Profit More than Doubles - Analyst Blog

Net earnings of Titanium Metals Corporation (TIE) more than doubled to $19 million or 11 cents per share in the second quarter of 2010 from last year’s $8.6 million or 5 cents. The robust growth in earnings came from lower raw materials costs, principally titanium sponge and scrap. Results exceeded the Zacks Consensus Estimate by a penny. 

Lower costs led to a 71% increase in operating income to $26.7 million. Margins came in at a higher rate of 40.8% versus 31.6% in the year-ago period. Titanium Metals ramped up production utilization rates with improving demand conditions.  

However, quarterly revenues of $212 million fell short of the Zacks Consensus Estimate of $218 million and improved modestly (3%) from the previous year. Although volumes increased particularly for melted titanium products backed by improving demand from the commercial aerospace sector, lower pricing restrained revenue growth. Lower selling price was attributable to lower annual pricing under long-term customer agreements on lower raw material index adjustments, lower spot market pricing and the relative mix of products sold during the period.

Melted product shipments of 1,305 metric tons reflected a two-fold increase from last years’ shipments of 605 metric tons. Average selling price, however, plunged 31% to $20.70 per kilogram. Milled products shipments of 3,170 metric tons were slightly down from 3,200 metric tons while product prices moved up to $53.10 per kilogram from $52.95 in the second quarter of 2009.

Financial View

Titanium Metals boasts of a debt free status. The company generated operating cash flows of $80.1 million and recorded cash and cash equivalent of $186.1 million as of June 30, 2010.
  
Outlook

The Dallas, Texas-based Titanium Metals foresees improving demand for titanium products in the longer term with increased production of fuel-efficient aircrafts in the aerospace market. The company expects to benefit from its emphasis on titanium metals and specialty titanium alloys for the aerospace industry, especially for jet engine applications.

Zacks Recommendation

Titanium Metals is the world's largest supplier of high quality titanium metal products. Given the company’s strong year over year results, rising titanium demand, operational efficiency, lower cost of raw materials and expanding market share, we remain very positive on the Titanium Metals in the near-term. We expect a strong pick-up in titanium demand in the second half of 2010 driven by higher defense spending from the government. After a delay of two years, the Boeing 787 completed its first flight in December last year, which is expected to drive demand for Titanium’s products. The company has posted a positive earnings surprise of 72% over the last four quarter on an average and we expect the company could post an upside of 44% in the next quarter.
 
Titanium is generating significant cash flow and has maintained debt-free status since 2009. We also remain optimistic on the long-term outlook of the aerospace industry, which is focusing on fuel-efficient aircraft requiring a higher proportion of titanium metal. However, Titanium Metal is exposed to falling titanium spot prices and fiscal 2010 is expected to be a tough year for Titanium as average selling prices appear to be meaningfully low due to competitive pricing.
 
We believe the stock is trading cheap at $22.62 as of August 3, 2010. Currently, Titanium Metals has a short-term (1 to 3 months) Zacks #1 Rank (“Strong Buy”) but a long-term (6 months and higher) Neutral recommendation.
 
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