Allegheny Misses 4Q Consensus - Analyst Blog

Allegheny Technologies Inc. (ATI) earned $15.1 million, or 15 cents per share, in the fourth quarter of 2010, missing the Zacks Consensus Estimate of 30 cents and falling significantly short from last year's $37.8 million, or 36 cents per share. Fourth-quarter results were impacted by a $19.5 million LIFO inventory valuation reserve charge and $20.4 million in start-up and idle facility costs, which reduced earnings by 26 cents per share.

For full year 2010, earnings were $79.9 million, or 82 cents per share, higher than $48.7 million, or 49 cents per share, in the year-ago period. This also missed the Zacks Consensus Estimate of 94 cents per share.

Quarterly revenues soared 27.2% year over year to $1.04 billion from $815 million on higher shipments and rising raw material prices. Yet revenues fell short of the Zacks Consensus Estimate at $1.06 billion. Yearly revenues jumped 33% to $4.05 billion from $3.1 billion, beating the Zacks Consensus Estimate of $4.1 billion.

Segment wise, revenue increases were distinct in the Engineered Products segment (56%) and in the Flat-Rolled Products segment (34%), while sales in the Higher Performance Material segment increased modestly (12%).

Segment in Details

High-Performance Metals: Sales in the segment accelerated 12% to $349.0 million due to an increase of  10% and 32% in shipments of titanium & titanium alloys and nickel-based & specialty alloys, respectively. Shipments were driven by higher demand in the commercial aerospace jet engine, oil and gas and biomedical markets.

Average prices for titanium and titanium alloys increased 7% due to higher raw materials indices and moved up by 15% for exotic alloys resulting from improved product mix. The segment's operating income decreased to  $63.5  million from $88.1 million in the year ago quarter.

Flat-Rolled Products: This segment contributed to revenues with rising volumes and prices. Sales jumped 34% year over year to $587.4 million on a 10% increase in stainless steel shipments and a 19% increase in high-value products shipments, coupled with a 17% surge in average prices for all products. Operating income declined 19.3% to $24.2 million.

Engineered Products: Higher demand from the oil and gas, transportation, aerospace, electrical energy and automotive markets boosted sales by 565% to $101.2 million in this segment. The segment reported profits of $0.3 million, flat year over year. Operating profit in the quarter was impacted by a LIFO inventory valuation reserve charge of $2.8 million, due to higher raw material costs, and $0.7 million in idle facility expense, which offset improved margins from higher shipments.

Margins

Allegheny's operating profit declined 25.7% to $88.0 million. The decline was due to a LIFO inventory valuation reserve charge of $19.5 million in the fourth quarter of 2010, compared with a benefit of $43.8 million in the fourth quarter 2009. Results were adversely affected by idled facilities and their start-up costs.

Balance Sheet

The company recorded cash and cash equivalent of $432.3 million as of December 31, 2010, a decline of 42.3% from $708.8 million as of December 31, 2009. Total debt to total capital was 34.3% as of December 31, 2010, compared with 34.7% at the end of 2009.

Outlook

Allegheny expects 2011 revenue growth to be in the range of 15% to 20% compared with 2010, and expects segment operating profit to be approximately 15% of sales. The company targets a minimum of $100 million in new gross cost reductions.  Capital expenditures are forecasted at $300 to $350 million.

Allegheny expects rising demand in the aerospace market to drive sales going forward. The company expects the global oil and gas/chemical process industry to remain strong due to increased demand from offshore oil and gas projects, large sour gas pipelines, desalination projects and increasing orders for chemical processing projects from several parts of the world.

In the electrical energy market, Allegheny expects demand for grain-oriented electrical steel for power distribution to remain essentially flat.  The company also expects demand from the nuclear electrical energy market to remain flat in 2011, although growth opportunities exist for new nuclear plants under construction over the next several years.

The medical market reached a record of nearly 6% of 2010 sales and Allegheny remains optimistic and expects demand to continue in 2011.

Zacks Recommendation

Based in Pittsburgh, PA, Allegheny Technologies Inc. is one of the largest and most diversified specialty materials producers in the world. The aerospace market has started recovering, which boosts the demand for Allegheny's products.

Separately, Allegheny has been arresting cost-pressures associated with high raw material costs by implementing price hikes through surcharges. Allegheny achieved gross cost reductions of over $173 million in 2009, exceeding its cost reduction target of $150 million. The High Performance Metals segment internally sources sponge, which is processed for use in titanium and titanium alloys, and zirconium and hafnium alloy products. The Engineered Products segment is also similarly integrated. Allegheny's integrated business model provides a competitive advantage.

The company's competitors include Carpenter Technology Corp. (CRS) and Sutor Technology Group Limited (SUTR).

Currently, Allegheny has a short-term (1 to 3 months) Zacks #3 Rank ('Hold') and a long-term Neutral recommendation.

 
ALLEGHENY TECH (ATI): Free Stock Analysis Report
 
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