Transcript Allegheny Technologies Incorporated. NYSE: ATI

Allegheny Technologies Incorporated
NYSE: ATI
May 3, 2009
By: John Ortelle
What ATI Does
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Allegheny Technologies aims to build “The
best specialty metals company in the world.”
ATI is a manufacturer of specialty metals,
including flat rolled metals, high performance
metals and engineered products.
Markets served include: aerospace, defense,
oil and gas, nuclear energy, chemical
process industry, automotive, construction,
and medical.
Allegheny Technologies
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Allegheny Technologies is a diversified
specialty metals producer with a growing
global reach; ATI has production facilities in
North America, Europe, and Asia.
30% of ATI sales are international; this
percentage has grown in recent years
because of a concentrated strategy by the
firm to become more globally diversified.
ATI 1 Year Price Chart
Five Forces
Suppliers: Raw material commodities.
Customers: Many large organizations with bargaining
power such as Boeing, the US gov’t and large oil
and gas companies.
Threat of new entrants: Large capital outlay required to
enter market.
Threat of Substitutes: No real substitute for specialty
metals in most applications.
Rivalry: Fairly intense rivalry between firms; ATI is one
of the the largest and is attempting to differentiate
through quality measures and large product offering.
SWOT Analysis
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Strengths:
$506m cash
$400m untapped domestic
credit facility
Two new production facilities
opening in ’09
Well diversified customer
base
Total cash on hand exceeds
total debt: $506m to
$503.5m
Planned cost reductions in
’09 of $150m
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Weaknesses:
Soft demand for most
products
Sensitivity to economy
Lower profit margins due to
raw materials mismatch
charges of $60m in 1Q ’09.
Will continue with $20m in
charges in 2Q ’09.
SWOT Analysis
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Opportunities:
Can take advantage of stimulus
plans in the U.S. and China
U.S. DOD report calls for more
ground combat and support
vehicles– ATI can benefit by
providing armor and metal for
frames
Can take advantage of low raw
materials costs
If economy recovers, ATI is in
position to return to higher
levels of profitability
Only 30% of sales international;
room to expand.
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Threats:
Weak economy may not
recover for some time
Future inflation may drive raw
material costs up
Pricing environment may
worsen due to competition
Weak demand may lead to
reduction in capital
expenditures.
Schedule pushouts in the
aerospace industry may
continue in the short term.
Selected Statistics
2008
Price
Allegheny
Technologies
$33.40
Market Cap
$3,255m
Revenues
$5,310 m
EPS (2008)
Profit Margin
EV per share
33.19
EV/EBITDA
3.29
Current Ratio
2.78
Quick Ratio
Asset TO
1.5
1.27
5.55
ROA
13.6%
10.70%
ROE
28.9%
P/E (ttm)
7.7x
Debt/Equity
P/CF
3.6x
Dividend per share
P/Sales
0.7x
Dividend yield
2.20%
P/ Tang. Book
1.9x
Payout Ratio
16.72%
0.26
$0.72
Competitor Comparison
Name
Allegheny Technologies
Inc.
Carpenter Technology
Corp.
Industry
Industrial Metals
Industrial Metals
Current Share Price
33.40
20.68
Market Value
$3,255 mil
$911 mil
Revenues
$5,310 mil
$1,831 mil
Net Earnings
$566 mil
$220 mil
Price/Sales
0.7
0.5
Price/Cash Flow
3.6
3.4
Price/Book
1.7
1.2
ROE
28.9%
28.1%
ROA
13.6%
13.4%
Time Series Comparison
Allegheny Technologies
in millions
1600
1400
1200
1000
800
Q1 2008
600
400
Q1 2009
Q4 2008
200
0
Net Income
Revenue
Cash
Total Debt
PRIOR YEAR
CASHFLOW
157.08
188.5
226.2
271.4
325.7
390.8
469.0
562.8
675.45
810.5
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
188.5
226.2
271.4
325.7
390.8
469.0
562.8
675.4
810.54
972.6
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.869
0.756
0.657
0.571
0.497
0.432
0.375
0.326
0.2842
0.247
163.919
171.0
178.4
186.2
194.3
202.7
211.6
220.8
230.40
240.4
10-YEAR GROWTH RATE
CASH FLOW
DISCOUNT RATE
AS DECIMAL
(.00)
DISCOUNT
FACTOR (
DISCOUNTED
VALUE PER
ANNUM
SUM OF PRESENT VALUE OF CASHFLOWS
2000.07
PRESENT VALUE OF RESIDUAL
$2,273.12
INTRINSIC VALUE (MILLIONS)
$4,273.19
RESIDUAL VALUE
CASHFLOW IN YEAR 10
GROWTH RATE AS DECIMAL (.00) (g)
972.6567787
0.04
NUMBER OF SHARES:
97,450,00
0
0.11
INTRINSIC VALUE PER
SHARE
$43.85
VALUE AT THE END OF YEAR 10
9196.027726
INTRINSIC(PER SHARE)/MARKET
1.4626
DISCOUNT FACTOR YEAR 10
0.247184706
FIRST 10 YEAR GROWTH RATE:
20.00%
CASHFLOW IN YEAR 11
CAPITALIZATION RATE (k - g)
1011.56305
2ND PERIOD GROWTH RATE:
DISCOUNT RATE:
4.00%
15.00%
1Q 2009 Results
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ATI beat analysts’ expectations, reporting an
EPS of $.06 per share.
Suffered from soft demand in most markets,
as well as $60 m out of phase raw materials
charges– as a result of the drop in prices
over the past few months.
Revenues and profits suffered as a result of
terrible economic conditions.
1Q 2009 Results
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Cash increased to $506m in 1Q ‘09 from $470m in
4Q 2008
This was helped along by a decrease in managed
working capital of $216.2m
YTD Cost Reductions- $34.8m; planned minimum
reductions of $150m for 2009.
Invested $108m in self funded projects: $450m
planned for 2009
No large debt maturities until 2011
Looking Forward
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ATI is ideally positioned to take advantage of a turn in the economy.
Government stimulus packages, especially in the U.S. and China will
benefit ATI.
The shift in US government Defense spending to more ground combat
vehicles will benefit ATI– they make armor for these vehicles.
Increase in the amount of nuclear power plants presents another
opportunity for ATI.
In the short term, the economic environment is difficult, but ATI is
cutting costs and adjusting production, while still self funding capital
investments.
The entire specialty metals industry is attractively valued, but ATI
provides diversification both it its wide product offerings and
geographically, making it the most attractive investment.
Recommendation
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I recommend that you BUY Allegheny
Technologies, especially if it dips back down
below $30 per share.
Questions?