Allegheny Technologies (NYSE: ATI) makes specialty metal products which meet certain hardness, conductivity, and malleability criteria. Consumers include aerospace and defense businesses as well as automotive and medical firms, including the Boeing Company (BA), the General Electric Company (GE) Aviation Division, and BAE Systems (BAESY). Though ATI does most of its business in the United States, a quarter of revenue is from direct international sales and the company estimates that international markets are responsible for up to 50% of total sales.
In October 2006, ATI announced a 2.5 billion dollar agreement with the Boeing Company (BA) to supply titanium for their commercial aerospace applications. In 2008 Boeing plans to unveil its newest plane, the Dreamliner 787, and Boeing's CEO, Patrick Hassey, believes this to be the largest deal Boeing has struck with any single partner. This key agreement not only provides long-term demand for ATI, but it also solidifies ATI's place as a leading titanium supplier.
As a specialty metals producer, ATI is highly dependent on the prices of raw materials. Because the market price for the company's specific raw materials is volatile, ATI is susceptible to unexpected changes in material expenses. Increasing environmental regulations and cyclical demand for ATI products create additional risks. The condition of the cyclical markets of key clients, such as the aerospace, transportation, and energy industries, plays a significant role in the success of ATI.
Over the fiscal year of 2007, ATI sales reached an all-time high of $5.45 billion and net income rose by 30% to $747 million, which comes out to $7.26 dollars per share. Many factors contributed to the record year for ATI, including a 15% increase in titanium shipments to about 41 million pounds as well as $457.1 million dollars in significant upgrades to ATI facilities across the globe. Moreover, for the first time in its history, ATI had more cash than debt. Net debts decreased from 19.3% in 2005 to (4.5%) in 2007.
ATI operates most of its inventories in a Last-In First-Out (LIFO) system (as opposed to First-In First-Out (FIFO)), so the day-to-day prices of raw materials plays a key role in their expenses. The market for many of their raw materials is highly volatile, making future price stability for ATI's own products unpredictable. Depending on whether raw material costs are rising or declining, LIFO or FIFO may be the efficient financial option.
By using the LIFO system, lower raw material costs in 2006 saved ATI $92.1 million dollars.
ATI has entered into a handful of long-term contracts, including many with the US government. On October 16, 2006 Boeing and ATI signed a titanium products supply deal worth $2.5 billion, which goes until 2015. Though certain economic events (such as an increase in costs) make entering into such fixed-price contracts detrimental for ATI, it is highly beneficial to have guaranteed customers when competing in an industry where product pricing is unpredictable.
The main consumers of ATI's products--such as the aerospace and defense, energy, and automotive industries--are subject to many economic forces that combine to make demand for their own products cyclical. Economic downturns can reduce consumption of automobiles or airplanes, for example, thereby reducing demand for ATI's goods. However, due to record backlogs in Boeing, Airbus, and their engine manufacturers, the demand for titanium compounds is expected to remain strong. Demand for cars has fallen because of the high oil prices, which reduces the automotive industry's demand for ATI's goods. Other factors that can weaken demand for ATI's metals include currency fluctuations, industrial overcapacity, and the availability and pricing of substitute goods.
ATI's main competitors within the specialty metals industry include Titanium Metals (TIE), RTI International Metals (RTI), Carpenter Technology (CRS), and the Russian firm VSMPO-AVISMA, which is the world's largest titanium producer by volume. Titanium is a key product for ATI; the company has invested over 800 million dollars to expand current titanium sponge processing plants across the country in the past three years. Moreover, titanium production accounts for just under a fifth of ATI's revenue, the most for any single one of ATI's metals. These companies produce many kinds of metals besides titanium, creating substitute goods for ATI's products. Below is a comparison of relevant operating metrics for each of these businesses for the fiscal year of 2007.
|Company||Total Rev. 2007 ($ millions)||Rev. from Titanium Production 2007 ($ millions)||Trailing P/E||Forward P/E||Operating Margins||Profit Margins|
|Titanium Metals (TIE)||$1,279||$952||10.85||10.13||26.37%||18.86%|
|RTI International Metals (RTI)||$627||$253||8.89||9.25||22.39%||14.69%|
|Carpenter Technology (CRS)||$1,945||$188||7.28||8.46||16.86%||14.49%|
P/E and Margins Data provided by annual reports and Yahoo Finance