Robust Growth for Titanium Metals - Analyst Blog

Titanium Metals Corporation (TIE) reported net earnings of $21.5 million or 12 cents in the third quarter of 2010 surpassing the Zacks Consensus Estimate of 11 cents and increasing from the prior-year earnings of $1.1 million or 1 cent. The robust growth in earnings was the result of lower raw materials costs, principally titanium sponge and scrap, and higher utilization of the production capacity.

Revenues

Quarterly revenues of $210.3 million, unlike earnings per share, fell short of the Zacks Consensus Estimate of $217 million and improved 15.9% 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.

Costs and Margins

Cost of sales declined slightly by 1.8% over the prior year quarter to $160.7 million. As a percentage of sales, costs were down to 76.4% in the reported quarter from 90.2% in the year ago quarter. This led to gross margins of 23.6% in the third quarter of 2010 versus 9.8% in the comparable period a year ago.

Selling, general, administrative and general expense also decreased 4% year over year to $13.6 million. Lower costs led to the increase in gross margins and a ten fold increase in operating income to $36.0 million versus $3.5 million in the comparable year quarter. Titanium Metals ramped up production utilization rates with improving demand conditions.

Shipments

Melted product shipments of 1,325 metric tons were almost double of last years' shipments of 675 metric tons. Average selling price, however, plunged 12.6% year over year to $20.90 per kilogram. Milled products shipments of 3,050 metric tons were down 14.4% from 2,665 metric tons and product prices inched down to $55.25 per kilogram from $56.00 per kilogram in the third quarter of 2009.

Outlook

Titanium Metals foresees improving demand for titanium products in the long 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.

Zacks Recommendation

Given the company's strong year-over-year results in the quarter, rising titanium demand, operational efficiency, lower raw materials costs and expanding market share, we remain optimistic on Titanium Metals in the near term. We anticipate a strong pick-up in titanium demand in the remaining fiscal 2010 driven by higher defense spending from the government.

Titanium is generating significant cash flow and has maintained a 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.

Currently, Titanium Metals has a short-term (1 to 3 months) Zacks #4 Rank (Sell), but a long-term (6 months and higher) Neutral recommendation.