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Allegheny Technologies Inc. (ATI): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Posted: 12/9/2013 7:00:00 AM
Referenced Stocks: ATI;KMT

We are downgrading our recommendation on Allegheny Technologies to Underperform. Earnings for the fourth-quarter 2014 came ahead of the Zacks Consensus Estimate. However, consolidated profit (as reported), slid year over year. Sales rose year over year on gains across the board, but missed expectations. While Allegheny should benefit from its diversified global growth markets and cost reduction measures, it remains affected by a sluggish global economic recovery and a few end-market challenges. Falling oil prices are expected to hurt demand for its products in the oil and gas market in the short haul. Moreover, costs associated with the HRPF and Rowley projects are expected to continue weighing on the profitability in the Flat-Rolled Products segment.


Pittsburgh, Pennsylvania-based Allegheny Technologies Inc. is a diversified specialty materials producer. The company was created in November 1999 when Allegheny Teledyne spun out Teledyne Technologies and Water Pik Technologies into standalone companies.

Allegheny originally had three main business segments: Flat-Rolled Products, High Performance Metals and Engineered Products. However, the company, in October 2013, announced the restructuring of its Engineered Products segment.

The restructuring include the integration of the specialty steel forgings business into ATI Ladish's forgings operations in the High Performance Metals division and the integration of the precision titanium and specialty alloy flat-rolled finishing business into ATI Allegheny Ludlum's specialty plate business in the Flat-Rolled Products segment. Other businesses that comprised the Engineered Products division have been classified as discontinued operations and include the tungsten materials business and the iron castings and fabricated components businesses.

Allegheny, on November 4, 2013, completed the sale of its tungsten materials business to Latrobe, PA-based wear-resistant products company Kennametal Inc. (KMT) for $605 million. The business unit produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools.

Allegheny decided to divest its tungsten materials business so that it can focus more on its core businesses High Performance Metals and Flat-Rolled Products. The move is also expected to increase Allegheny's financial flexibility and simplify its capital allocation and deployment.

Allegheny's Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, titanium and titanium-based alloys, and specialty alloys in various product forms - plates, sheets, engineered strips and precision rolled strip products, as well as grain-oriented electrical steel sheets - to independent service centers and end-use customers. It serves chemical process, oil and gas, electrical energy, automotive, food equipment and appliances, machine and cutting tools, construction and mining, aerospace and defense, electronics, communication equipment and computer industries. In the segment, Allegheny owns a 60% interest in a Chinese joint venture company, Shanghai STAL Precision Stainless Steel Company Limited (STAL), which commenced commercial production in 2000. Baosteel Group owns the remaining 40%. Allegheny also owns a 50% interest in the industrial titanium joint venture known as Uniti LLC. Verkhnaya Salda Metallugical Production Association (VSMPO), the Russian producer of titanium, aluminum and specialty steel products owns the remaining 50% interest.

Allegheny's High Performance Metals segment produces, converts and distributes high performance alloys including nickel and cobalt-based alloys and super alloys titanium and titanium-based alloys exotic metals (such as zirconium, hafnium, niobium and nickel-titanium) and their related alloys and other specialty alloys primarily in long product forms, such as ingot, billet, bar, shapes and rectangles, rod, wire, seamless tube, and castings. It sells products directly to end-users in the aerospace and defense, chemical process industry, oil and gas, electrical energy and medical sectors. About 70% of the demand in the segment comes from the aerospace and defense market.

Allegheny recorded sales of roughly $4,223 million in 2014 with Flat-Rolled Products and High Performance Metals divisions accounting for 52% and 48%, respectively.

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