Allegheny Technologies (
) reported net income for the first quarter 2013 slumping 82% to
$10.0 million, or $0.09 per share, on sales of $1.18 billion.
For this diversified maker of specialty metals products from
stainless steel to titanium and superalloys, that was quite a drop
compared with net income of $56.2 million, or $0.50 per share, on
sales of $1.35 billion for Q1 last year.
But the Zacks Rank has been on top of this decline since the summer
of 2011 when the stock was at $65. To be specific, ATI has spent
most of its time as a Zacks #4 Rank (Sell) or #5 Rank (Strong Sell)
in the past 22 months as it fell to back to 52-week lows this week
The Price & Consensus Chart, which plots annual earnings
estimates against the stock price, says it all...
Heavy Metal Blues
Allegheny is facing an overcapacity of competitive stainless steel,
according to a Zacks Equity Research report dated April 25. A
significant portion of the sales under the High Performance Metals
segment is made to customers in the commercial aerospace industry,
a historically cyclical industry.
Although the aerospace market has shown some improvement recently,
Allegheny expects continue to see a slower growth in its High
Performance Segment, which generates a major chunk of revenues.
Weak demand from nuclear energy is also expected to affect the
division in the first half of 2013.
Delays in some large oil and gases projects (using Allegheny s
nickel alloy flat-rolled plate) led to a decline in shipment in the
company s core Flat-Rolled Products segment in 2012. Margins in the
segment have been depleting as well.
Finally, rising input costs are putting margin pressure on all
domestic steel manufacturers. These costs include scrap metals as
well as energy.
For Allegheny, a hypothetical $1.00 per MMBtu increase in the price
of natural gas would result in increased annual energy costs of
approximately $10 million to $12 million. Costs of scrap as well as
that of oil are rising significantly.
A change of $1.00 per pound in nickel prices would result in
increased costs of about $95 million, while a change of $0.01 per
pound of ferrous scrap would result in increased costs of
approximately $8 million.
Notes from the Boss
And the outlook from top of the company didn't give analysts any
reason to believe the business is turning around any time soon.
"We saw continued sluggish demand from many of our major end
markets during the first quarter," said CEO Rich Harshman. "While
we see some signs of improvement as we enter the second quarter and
it appears the fourth quarter 2012 may have been the trough in
demand, we expect challenging conditions to continue to impact many
of our end markets throughout the second quarter," he said.
"We believe our customers will continue to remain cautious as
near-term global economic uncertainties remain, lead times remain
short, and raw materials prices, especially for nickel and titanium
scrap, remain under pressure."
Bottom line: The specialty steel makers as a group are currently
ranked in the dungeon, 251 out of 265 in the Zacks Industry Rank
system. Until the Zacks Rank gives us a heads up that earnings are
turning the corner for steel makers like ATI, it's probably best to
find other industries to invest in.
Kevin Cook is a Senior Stock Strategist with
ALLEGHENY TECH (ATI): Free Stock Analysis
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