On June 19, we downgraded
) to Underperform. Our view reflects sustained weakness in the
company's standard stainless products business, pricing pressure
and a weak demand environment.
Why the Downgrade?
The metal processor's profit for first-quarter 2013, reported
on April 24, slid year over year as sluggish economic conditions
hurt demand for its products. Sales fell at a double-digit clip
on weakness across a number of end markets and lower pricing.
Earnings for the quarter matched the Zacks Consensus Estimate
while sales miss.
Estimates for Allegheny have been declining following the
release of the first quarter results. The Zacks Consensus
Estimate for 2013 has gone down roughly 24% to $1.02 per share.
The Zacks Consensus Estimate for 2014 has also declined around
16% to $2.14. With the Zacks Consensus Estimates for both 2013
and 2014 going down, the company now has a Zacks Rank #5 (Strong
Cause for Concern
Allegheny is contending with a soft economy and raw material
cost pressures. Reduced raw material surcharges and low base
prices of standard stainless products are hurting the results of
its key Flat-Rolled Products segment. Weak demand and increased
Asian imports are contributing to lower stainless steel sheet
plate prices. Moreover, weak demand from nuclear energy is
expected to affect Allegheny's High Performance Metals segment
through first-half 2013.
Demand for Allegheny's standard stainless products has been
hit by rapidly falling raw material surcharges, resulting in
customers delaying purchases. In addition, the same factors
appear to be influencing short-term demand for some high-value
products from some key end-markets as many customers are being
cautious and keeping inventories lean.
Allegheny anticipates the business environment to remain
challenging through first-half 2013. The uncertain economic
environment given the concerns surrounding the U.S. fiscal policy
and eurozone crisis is expected to continue to affect demand for
the company's products in the second quarter of 2013. Allegheny
expects modest year over year improvement in sales and operating
profit in 2013.
Other Stocks to Consider
While we prefer to stay away from Allegheny, other companies
in the basic materials sector with favorable Zacks Rank are
Kobe Steel Ltd.
Shiloh Industries Inc.
Angang Steel Company Limited
). While both Kobe Steel and Shiloh Industries hold a Zacks Rank
#1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).
ANGANG STEEL LT (ANGGY): Get Free Report
ALLEGHENY TECH (ATI): Free Stock Analysis
KOBE STEEL-ADR (KBSTY): Get Free Report
SHILOH INDS INC (SHLO): Get Free Report
To read this article on Zacks.com click here.