Recent Posts

Hexcel Corporation (HX): Downgrading Shares To Outperform On Reduced Near-Term Earnings Visibility

Hexcel Corporation is one of the companies positioned within the aerospace supply channel with elevated exposure to the market headwinds we highlighted in prior notes, including a destabilized 787 aircraft program (following a pullback in monthly build rates) and volume disruptions associated with extended military production bottlenecks. This morning, we lowered estimates on HXL to fully discount a delayed sales recovery risk or weaker-than-expected shipments to key customers like Boeing and Lockheed Martin. With respect to the limited near-term earnings visibility, we also downgraded the shares to OUTPERFORM (versus Strong Buy). Continue reading

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3:44 AM

Carpenter Technology (CRS): The Inflection Point May Still Be Two Quarters Away – Lowering CY22 Estimates

We are lowering estimates for Carpenter Technology (CRS) once again to better align with the potential risks highlighted in a report published last week (BA787 and military/defense) and to discount the impact from a delayed ramp in premium alloy mill demand. Additional analysis suggests the company may be 1-2 quarters away from realizing any benefits (or positive EPS results) associated with improving jet engine orders and/or commercial aircraft build rates. Moreover, CRS may have slightly more exposure to any negative direct/indirect events tied to the coronavirus variant outbreak, semiconductor chip shortage, and Boeing 787 program instability (versus the peer group). Continue reading

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8:15 AM

The Boeing Company (BA): Updated Scenario Analysis Based On Existing Commercial Aircraft Production Schedules

We updated The Boeing Company (BA) model to align with expected commercial aircraft deliveries and future production changes. Revised assumptions for the BCA segment resulted in a slightly lower earnings outlook for this year and CY22, with the primary negatives related to the 737 and 787 aircraft programs. Downward adjustments aside, we still believe the BA shares are attractively valued today, especially after completing our EPS upside analysis. Bottom-line, the core portfolio earnings power strengthens considerably (and the FCF generation) if the company can realize those aggressive aircraft production targets embedded in the latest schedules shared with the global supply chain. Continue reading

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10:05 AM

Tale of the Tape: General Electric Versus Rolls-Royce

A pre-fight company comparison between General Electric (GE) and Roll-Royce (RR), including global market analysis supported by the release of new industry data points, collection of channel insights, and future commercial aircraft build rates confirmed our underlying view regarding the relative strength in GE/CFM demand and the aircraft/engine programs driving the optimistic production and aftermarket services outlook. While Rolls-Royce recently issued multi-year jet engine production schedules to their global suppliers that included downward revisions, the GE procurement team seems to be reiterating optimism and upward bias to CY22-23 expectations. We still expect the aggressive production outlook to culminate into a surge in parts and materials sourcing. Continue reading

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1:37 AM

Allegheny Technologies (ATI): Raising Estimates On Projected Aerospace Demand Strength; New LEAP Outlook

We are increasing Allegheny Technologies (ATI) estimates to account for an increasingly favorable commercial aerospace sales outlook, better-than-expected specialty materials survey results and upward movement in product pricing. After adjusting for the new production schedules shared by jet engine manufacturers and rising single-aisle aircraft build rate assumptions, the company appears to be on-track to generate $1.05-1.10/share of earnings by CY23 on stronger mill volumes and favorable premium forge sales contribution. Continue reading

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8:49 AM

Carpenter Technology (CRS): Initiating Coverage With A Strong Buy; This Is Our New Top Pick

We are initiating coverage on Carpenter Technology (CRS) with a Strong Buy investment rating and $50/share target price. Following a short period of trading weakness, we are comfortable with the lower entry point. The shares look undervalued today, especially after the consideration of better-than-expected survey results and backdrop of macroeconomic strength, rebounding channel sentiment, commodity nickel price inflation and enhanced commercial aero demand visibility. Market intelligence suggests the specialty materials group is at or near a summer inflection point which should be followed by a multi-year period of above-average top-line growth. Continue reading

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11:47 AM

The Boeing Company (BA): Expect A Bumpy Path To Earnings Recovery; Lowering Estimates

We are lowering estimates on The Boeing Company (BA) to account for the approaching commercial aircraft segment shortfall. We expect total deliveries to fall about twenty jets below 2Q21 forecasts as another FAA inquiry has resulted in a 787-customer shipment halt, which translates into roughly $0.50/share of near-term earnings dilution in our model. Presumably, consensus expectations will reset following the company issuance of another disappointing monthly aircraft delivery report in early July. Continue reading

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7:32 AM

Allegheny Tech (ATI): Stainless and Premium Alloy Strength Sets Specialty Materials Group Apart From Metals Pack

This is no time to panic! We are sticking with bullish investment ratings on certain names from the specialty materials group despite recent downward metals and mining trading pressure. Companies like Allegheny Technologies (ATI) and Haynes International (HAYN) should benefit from strengthening top-line drivers throughout 2H21 and CY22. Continue reading

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10:04 AM

Aerospace: Upgrading Upstream Suppliers On Stronger Aero Sales Outlook And Potential Bottleneck Benefits

We are making a rotational call within the aerospace coverage group, now favoring upstream suppliers that appear to be positioned to benefit from a changing commercial aircraft production environment. The investor narrative may shift to the premium forgers and/or specialty materials providers earlier-than-expected as the supply chain readies for a sharp inflection in demand for 737MAX or A320neo applications, looking beyond negative near-term earnings expectations. As such, we are changing ratings on a few companies that fit into that description. Today, we are formally upgrading Hexcel Corporation (HXL) and Haynes International (HAYN) to Strong Buy investment ratings and moving Allegheny Technologies (ATI) over to Outperform. We had previously rated all three Hold. Continue reading

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8:28 AM

Allegheny Technologies (ATI): Increasing Estimates On Improving Demand Outlook and Future Aero Build Rates

We are increasing Allegheny Technologies (ATI) estimates to reflect a growing upward bias associated with rebounding commercial aerospace demand momentum, incremental macroeconomic strength, and better-than-expected survey results. After accounting for the latest MAX, NEO and LEAP production schedule revisions and channel reports of rebounding premium alloy volumes , we now expect the company to generate generating positive EPS results by 1Q22. Continue reading

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7:31 AM

Aerospace: Suppliers Are Reacting To The New LEAP Production Targets

General Electric (GE) held a conference call with its major suppliers to review all details behind the newly implemented LEAP production schedule and to ensure supply chain alertness. Last week, the company effectively raised the CY22 production outlook to 360-370 engines to account for stronger single-aisle aircraft build rates. This was the third major scheduling adjustment announced by the aircraft OEMs and jet engine suppliers, which suggests an upward bias to CY22-23 expectations for the coverage group. Continue reading

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6:53 AM

The Boeing Company (BA): New Production Schedules Confirm Management Confidence In 737 Demand – Upgrading Shares To Outperform

We are upgrading the shares of The Boeing Company (BA) to an OUTPERFORM recommendation today, with a twelve-month price target of $275/share, following the early identification of positive trading catalysts expected to develop in the coming months. Notably, our latest aerospace channel checks, which included discussions regarding the latest commercial aircraft production schedules released to all major suppliers, seems to be indicating an upward bias to Street expectations (focusing on CY22 and beyond). Continue reading

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9:37 PM

The Boeing Company (BA): Dissecting A Fifth-Consecutive Quarterly Earnings Loss; Will Number Six Be The Last?

A relatively upbeat aerospace market and corporate outlook provided by The Boeing Company (BA) management team, which was confirmed later in the week by Airbus (AIR), indicates the OEMs are nearing a point of stabilization. Assuming the current 737 MAX electrical situation does not become systemic problem, we believe the earnings shortfall risk may be starting to abate. We plan to take a closer look at the industry drivers and company modeling assumptions upon completion of our aero supply channel checks.

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9:00 AM

Hexcel Corporation (HXL): One Step Closer To Stability, Assuming The Aircraft Production Rates Hold

We came away from the latest Hexcel Corporation (HXL) quarterly earnings update and investor call somewhat intrigued by the latest market outlook, continuation of the cost reduction strategy, and uptick in confidence communicated by the management team. We would consider a rating change should the shares pullback and market intelligence confirm a reversal in upstream demand. Our hesitancy relates to the unfavorable macro environment and expected change in wide-body aircraft schedules (lower for longer). Continue reading

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12:45 PM

Nucor Corporation (NUE): Gauging Upside/Downside Against Our Already Aggressive $10+ EPS Forecast For CY21

After raising estimates for the current quarter and year to reflect the better-than-expected mid-quarter guidance issued by the management team last week, we examined some of the larger NUE portfolio drivers, looking to gauge the upside and downside risk as it relates to two major issues: (1) the sustainability of the Section 232 trade protections during a new period of US Presidential leadership; and (2) the upside bias associated with the release of a large infrastructure bill. Starting with a $10.00+ and $8.28/share earnings forecast for CY21 and CY22, respectively, already well above consensus, we calculated roughly $1.75-2.00 of potential earnings upside associated with surging demand for niche carbon steel products dedicated for large-volume public construction projects. Conversely, we assume there to be $1.40-1.50/share of earnings dilution risk should President Joe Biden rescind Section-232 trade protections. This implies a +30% risk/reward profile. Continue reading

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12:50 AM

Steel: Adjusting Ratings, Raising Price Targets and Revising Estimates Following Strong Survey Results

We rearranged the steel coverage group investment ratings to account for recent trading strength, the divergence between the closing prices and price targets, and higher earnings outlook(s). Today’s actions were triggered by the better-than-expected carbon steel survey results and review of future market drivers. Among the major changes, we upgraded Nucor (NUE) after considering the new earnings outlook and the rising potential for a stimulus trading boost. At the same time, we lowered STLD and RS to OUTPERFORM (versus Strong Buy) following the recent surge in trading. While still positive on these two names, we would be less aggressive. Finally, we referred to the surprising level of bullishness building throughout the channel and strong survey data points. The most interesting takeaway involved steel contacts raising their year-end HRC price forecast by $100-125/ton. Continue reading

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6:04 PM

Specialty Materials: Increasing Estimates On The Premium Alloy Suppliers Levered To Jet Engine

Positive data points and contact commentary collected during quarterly checks on the specialty materials group serves as the key catalyst behind the upward estimate revisions we applied to certain names within our coverage universe. Today, we raised estimates on Allegheny Tech (ATI) and Haynes International (HAYN) to reflect the upward bias associated with enhanced aerospace and turbine sales exposure. Continue reading

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10:31 AM

Allegheny Technologies (ATI): Upgrading The Shares To A Hold As GE Provides Early Jet Engine Supplier Optimism

We are upgrading the shares of Allegheny Technologies (ATI) to a HOLD. After speaking with industry contacts and reviewing aerospace OEM production schedules, we believe earnings estimates are more likely to move higher from the current point. Despite our concerns regarding the extended valuation, we decided to move to a neutral position on the shares as we can no longer identify a “smoking gun” that could push the stock price meaningfully lower. Continue reading

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8:50 AM

Haynes International (HAYN): Another Weak Report But An Inflection Point May Finally Be On The Radar (Recap)

The HAYN management team is echoing a similar sentiment as most of its direct competitors: While most of the operating results reported this month have been underwhelming and CY21 earnings expectations are generally subdued, the specialty materials peer group seems to be approaching a point of stabilization. Companies levered to the premium alloys expect an inflection point to develop within the next 2-3 quarters with the titanium turn seen lagging by 1-2 quarters. Continue reading

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8:30 AM

Allegheny Technologies (ATI): The Company Closes Out CY20 With A Fourth-Straight Earnings Beat (Recap)

Allegheny Technologies (ATI) reported an adjusted 4Q20 earnings loss of $0.33/share, which exceeded consensus expectations on better-than-expected AAS segment results, stabilized jet engine demand, and portfolio reshaping (Tier4: -$0.40; Street: -$0.36). CEO Bob Wetherbee and his leadership team were highly focused on portfolio optimization and their aggressive efforts started to bear fruit, clearly demonstrated by four consecutive quarterly EPS beats (against the COVID-19 market backdrop). Continue reading

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1:20 PM

The Boeing Company (BA): Downgrading To Underperform On Commercial Aircraft Demand And Balance Sheet Concerns

We downgraded the shares of The Boeing Company (BA) to UNDERPERFORM this evening following a thorough review of important macro drivers and the secondary data collected from our aero supplier surveys. Ahead of the company’s 4Q earnings update, scheduled for late-January, we believe BA shares could dip below $200 should the investor focus shift to a muted earnings growth outlook and balance sheet stress. Coincidently, we are also less-bullish on our beloved Cleveland Browns heading into the Sunday playoff game, but we digress… Continue reading

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4:47 PM

Allegheny Technologies (ATI): What Are The Odds The Dreamliner Turns Into A Supplier Nightmare?

We lowered earnings estimates for two of The Boeing Company suppliers potentially over-levered to the Dreamliner program: Allegheny Technologies (ATI) and Hexcel Corporation (HXL). The shares of both companies have traded higher over the past few months, but the valuation looks overextended to us. We remain particularly guarded on the ATI due to the enhanced program leverage. Our UNDERPERFORM rating includes a revised target price of $11/share (up from $8), reflecting about 40% downside versus the Thursday close. Continue reading

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9:52 AM

Hexcel Corporation (HXL): What Are The Odds The Dreamliner Turns Into A Supplier Nightmare?

We cannot recall another time during our long history in sell-side research when the best idea highlighted from our coverage was: investors should avoid the entire peer group right now. Ultimately, we deemed it more appropriate to shift the note topic to the new developments detected in our propriety channel checks that may be interpreted as bearish by investors. We lowered earnings estimates for two of The Boeing Company suppliers potentially over-levered to the Dreamliner program: Hexcel Corporation (HXL) and Allegheny Technologies (ATI). Continue reading

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8:19 AM

Steel Dynamics (STLD): The Opposite of SteelMageddon – Raising Estimates and Target Price

What is the opposite of Steelmageddon? Whatever word just popped into your head is probably the best way to describe current domestic steel industry fundamentals. Following a closer look at the drivers behind the carbon flat rolled markets, and communicating with several channel contacts, we decided to increase our carbon sheet price forecasts and the estimates on STLD. Continue reading

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9:52 AM

Aerospace: The Runway To Recovery Will Be Long And Bumpy For Upstream Suppliers

Consensus estimates still look aggressive, in relation to fundamentals, for aerospace suppliers levered to premium forge, composite materials, metal fabrication, and raw materials. We believe the tier-3/4 peer group may still be 4-5 quarters away from an inflection point, which could be followed by muted demand in CY22 regardless of the COVID-19 vaccination outcome. After updating various industry models, we generated a CY21 baseline growth forecast for upstream aero suppliers at down 12-13% for CY21. We also lowered estimates on Allegheny Tech (ATI) and Hexcel Corp (HXL) this morning, after completing this market analysis and reviewing the negative survey data points referenced in this report. Continue reading

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8:32 AM

Haynes International (HAYN): We Are Not Ready To Clear The Shares For Takeoff; Initiating Coverage With A HOLD

Today, we are formally initiating coverage on Haynes International (HAYN) with a HOLD rating. While we certainly understand the initial exuberance around the aerospace suppliers and specialty materials peer group, following Monday’s vaccination news, we caution investors that underlying fundamentals are still quite weak. We prefer to wait for evidence of better titanium and nickel-based alloy trends before turning more constructive on this company or the peer group. Continue reading

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8:37 AM

The Boeing Company (BA): 3Q20 Results Were Generally In-line, But CY21 Visibility May Be Waning

Despite a relatively solid earnings update, which beat our forecast for the first time in four quarters, we are unable to construct a convincing bull-case argument. We ultimately came away with from yesterday’s update with limited earnings and FCF visibility, still digesting the conservatism embedded in management’s commentary. While there were no formal changes made to aircraft build rates, downward adjustments seem almost inevitable against the backdrop of waning demand. Continue reading

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7:58 AM

Reliance Steel & Alum (RS): One Of The Names That Could Really Surprise To The Upside Next Week

We like the set-up for Reliance Steel & Aluminum Co (RS) heading into next week’s earnings report and reiterate our OUTPERFORM recommendation on the shares. After reviewing all key portfolio drivers, we see very high probability of a 3Q20 earnings beat (and favorable guidance) primarily driven by ferrous and nonferrous metals pricing strength, healthy shipment levels, a tolling recovery, and improved cost position. Continue reading

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6:23 AM

Nucor Corporation (NUE): Solid 3Q Guidance Without Much Help From Carbon Sheet Or Plate

Nucor Corporation (NUE) kicked off the mini-earnings preview period by issuing a 3Q20 earnings outlook that crushed expectations. Yesterday, the management team offered an EPS guidance range of $0.50-0.55, considerably better than the $0.37 consensus forecast, citing continued strength in Downstream Product volumes/margins and better-than-expected carbon bar and beam mill shipments. Continue reading

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9:00 AM

Allegheny Technologies (ATI): Initiating Coverage With An UNDERPERFORM Recommendation

We are initiating formal coverage on the shares of Allegheny Technologies (ATI) with an UNDERPERFORM recommendation and twelve-month target price of $8. While we are somewhat intrigued by the long-term value associated with: the calculated portfolio firepower (during periods of cyclical strength); recent market share gains; and the cost reduction measures implemented by the management team, we could not ignore the pronounced weakness in commercial aerospace demand and historically weak survey results in 2H20. Continue reading

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7:00 AM
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