(By Balaseshan) Deutsche Bank analyst David Martin upgraded his rating on shares of Allegheny Technologies Inc. (NYSE:ATI) to "Buy" from "Hold" with $50 price target, saying underperformance looks overdone and risk-reward now looks attractive.
ATI shares year-to-date have underperformed specialty & commodity peers (down 30%; down 15%). Martin thinks this ignores positives for end markets and company improvements. Aerospace demand, growth initiatives, product innovation and streamlining should support ATI shares.
A&D now account for more than 30% of ATI sales and the analyst sees Boeing Co. (NYSE:BA)/Airbus production rates continue to rise (16% and 7% in 2012-2013). This includes higher build rates for the Ti-intensive 787 and while not immune to macro slowdown, aerospace should see more resilience.
Aftermarket growth (repair/replacement) expected to be 7%-9% in 2012-2013, and HP backlogs of $2 billion offer visibility. In its more commoditized businesses, demand should grow 3% - 5%. Key projects like the UT ti-sponge plant and the HRPF facility are on track; should boost capacity and grow end markets reach.
Agreement to supply GE Aviation affirms ATI's recent trend of securing LTA with 'new' products (revenue opportunity estimated $2 billion). Ladish accretive in 1Q, Martin expects more benefits.
Martin said outlook tone clearly more cautious given growing uncertainty and greatest area of concern is commodity stainless. However, elsewhere comments / outlook appear unchanged.
ATI's 2012 financial targets are 10%-plus sales growth and segment EBIT margin of 13%-14% (implies EPS of $2.40-2.75). Martin's concern has been aggressive company guidance/Street expectations and risks to the second half results/guidance.
The analyst's EPS estimates are $2.17 for 2012 and $3.51 for 2013 (11%-16% below Street), based on 10%- 8% sales growth in 2012-2013 and corp EBIT margins of 8%-12%.
These risks now appear discounted, and investors appear to price in 2013 EBITDA that is 30% below Martin's estimate. He sees share price downside risk of 15% (on trough earnings/multiple) and far greater upside based on his and other scenarios.
Allegheny is a diversified specialty metals producer. Its products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings, and grey and ductile iron castings.
ATI is trading up 2.37% at $28.89 on Thursday.