Specialty Materials Coverage Group

We are not picking up any new market intelligence this month to suggest there is an upward bias to earnings expectations for the specialty materials peer group. Last month, we raised near-term forecasts to reflect the better-than-expected nickel-based alloy and jet engine demand trends. However, we see few similarities in the titanium space as volume growth is holding in negative territory and contacts are still forecasting negative full-year growth. The main difference between this market and other alloys is the excess inventory held by the aero supply chain which could push the recovery starting point 6-9 months to the right (for companies levered to commercial airframe applications). Continue reading

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

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

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

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

We updated the Haynes International (HAYN) model ahead of the FY1Q earnings report, set for later this week. We have been holding a neutral position on the shares, but our bias leans negative following the collection of weak survey data points and subdued contact feedback. Continue reading

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

Feedback coming out of the specialty materials channel supports the bearish call we are making on the global titanium market and selected companies within the specialty materials peer group. Bottomline, raw material providers, mill contacts, metal distributors, fabricators, and premium forgers are all voicing concerns about an extended period of end-demand weakness, a difficult CY21 environment, operating inefficiencies, and destabilized pricing environment.

Names within in our coverage universe with titanium leverage include Allegheny Technologies (ATI), Howmet Aerospace (HWM), Carpenter Technology (CRS) and Haynes International (HAYN). Continue reading

We updated our titanium industry model to account for revised commercial airframe and jet engine production targets and other ancillary factors. The revised industry analysis implies CY21 may be another challenging year for all global mills and service centers levered to aerospace alloys Continue reading

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

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

The Allegheny Technologies (ATI) management team seems to be executing at a high level right now, setting up the framework to emerge from the aerospace industry doldrums in a far better position than its peers. Unfortunately, we lack the conviction on the aerospace recovery timeline to get aggressive. Continue reading

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