May 3, 2009

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Allegheny Technologies Incorporated

NYSE: ATI

May 3, 2009

By: John Ortelle

What ATI Does


Allegheny Technologies aims to build “The
best specialty metals company in the world.”


ATI is a manufacturer of specialty metals,
including flat rolled metals, high performance
metals and engineered products.


Markets served include: aerospace, defense,
oil and gas, nuclear energy, chemical
process industry, automotive, construction,
and medical.

Allegheny Technologies


Allegheny Technologies is a diversified
specialty metals producer with a growing
global reach; ATI has production facilities in
North America, Europe, and Asia.


30% of ATI sales are international; this
percentage has grown in recent years
because of a concentrated strategy by the
firm to become more globally diversified.

ATI 1 Year Price Chart

Five Forces

Suppliers: Raw material commodities.

Customers: Many large organizations with bargaining
power such as Boeing, the US gov’t and large oil
and gas companies.

Threat of new entrants: Large capital outlay required to
enter market.

Threat of Substitutes: No real substitute for specialty
metals in most applications.

Rivalry: Fairly intense rivalry between firms; ATI is one
of the the largest and is attempting to differentiate
through quality measures and large product offering.

SWOT Analysis


Strengths
:


$506m cash


$400m untapped domestic
credit facility


Two new production
facilities opening in ’09


Well diversified customer
base


Total cash on hand exceeds
total debt: $506m to
$503.5m


Planned cost reductions in
’09 of $150m



Weaknesses:


Soft demand for most
products


Sensitivity to economy


Lower profit margins due to
raw materials mismatch
charges of $60m in 1Q ’09.
Will continue with $20m in
charges in 2Q ’09.


SWOT Analysis


Opportunities:


Can take advantage of stimulus
plans in the U.S. and China


U.S. DOD report calls for more
ground combat and support
vehicles


ATI can benefit by
providing armor and metal for
frames


Can take advantage of low raw
materials costs


If economy recovers, ATI is in
position to return to higher
levels of profitability


Only 30% of sales international;
room to expand.


Threats:


Weak economy may not
recover for some time


Future inflation may drive raw
material costs up


Pricing environment may
worsen due to competition


Weak demand may lead to
reduction in capital
expenditures.


Schedule pushouts in the
aerospace industry may
continue in the short term.



Selected Statistics

2008

Allegheny
Technologies

Price

$33.40

Market Cap

$3,255m

Revenues

$5,310 m

EPS (2008)

5.55

Profit Margin

10.70%

P/E (ttm)

7.7x

P/CF

3.6x

P/Sales

0.7x

P/ Tang. Book

1.9x

EV per share

33.19

EV/EBITDA

3.29

Current Ratio

2.78

Quick Ratio

1.5

Asset TO

1.27

ROA

13.6%

ROE

28.9%

Debt/Equity

0.26

Dividend per share

$0.72

Dividend yield

2.20%

Payout Ratio

16.72%

Competitor Comparison

Name

Allegheny Technologies
Inc.

Carpenter Technology
Corp.

Industry

Industrial Metals

Industrial Metals

Current Share Price

33.40

20.68

Market Value

$3,255 mil

$911 mil

Revenues

$5,310 mil

$1,831 mil

Net Earnings

$566 mil

$220 mil

Price/Sales

0.7

0.5

Price/Cash Flow

3.6

3.4

Price/Book

1.7

1.2

ROE

28.9%

28.1%

ROA

13.6%

13.4%

Time Series Comparison

Allegheny Technologies
0
200
400
600
800
1000
1200
1400
1600
Net Income
Revenue
Cash
Total Debt
in millions
Q1 2008
Q4 2008
Q1 2009
PRIOR YEAR
CASHFLOW





157.08

188.5

226.2

271.4

325.7

390.8

469.0

562.8

675.45

810.5

10
-
YEAR GROWTH RATE



0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

CASH FLOW





188.5

226.2

271.4

325.7

390.8

469.0

562.8

675.4

810.54

972.6

DISCOUNT RATE
AS DECIMAL
(.00)





0.15

0.15

0.15

0.15

0.15

0.15

0.15

0.15

0.15

0.15

DISCOUNT
FACTOR (





0.869

0.756

0.657

0.571

0.497

0.432

0.375

0.326

0.2842

0.247

DISCOUNTED
VALUE PER
ANNUM





163.919

171.0

178.4

186.2

194.3

202.7

211.6

220.8

230.40

240.4

SUM OF PRESENT VALUE OF CASHFLOWS

2000.07

RESIDUAL VALUE





CASHFLOW IN YEAR 10



972.6567787

GROWTH RATE AS DECIMAL (.00) (g)



0.04

CASHFLOW IN YEAR 11



1011.56305

CAPITALIZATION RATE (k
-

g)



0.11

VALUE AT THE END OF YEAR 10



9196.027726

DISCOUNT FACTOR YEAR 10



0.247184706

PRESENT VALUE OF RESIDUAL



$2,273.12

INTRINSIC VALUE (MILLIONS)



$4,273.19

NUMBER OF SHARES:




97,450,00
0


INTRINSIC VALUE PER
SHARE



$43.85

INTRINSIC(PER SHARE)/MARKET



1.4626

FIRST 10 YEAR GROWTH RATE:



20.00%

2ND PERIOD GROWTH RATE:



4.00%

DISCOUNT RATE:



15.00%

1Q 2009 Results


ATI beat analysts’ expectations, reporting an
EPS of $.06 per share.


Suffered from soft demand in most markets,
as well as $60 m out of phase raw materials
charges


as a result of the drop in prices
over the past few months.


Revenues and profits suffered as a result of
terrible economic conditions.

1Q 2009 Results


Cash increased to $506m in 1Q ‘09 from $470m in
4Q 2008


This was helped along by a decrease in managed
working capital of $216.2m


YTD Cost Reductions
-

$34.8m; planned minimum
reductions of $150m for 2009.


Invested $108m in self funded projects: $450m
planned for 2009


No large debt maturities until 2011

Looking Forward


ATI is ideally positioned to take advantage of a turn in the economy.


Government stimulus packages, especially in the U.S. and China will
benefit ATI.


The shift in US government Defense spending to more ground combat
vehicles will benefit ATI


they make armor for these vehicles.


Increase in the amount of nuclear power plants presents another
opportunity for ATI.


In the short term, the economic environment is difficult, but ATI is
cutting costs and adjusting production, while still self funding capital
investments.


The entire specialty metals industry is attractively valued, but ATI
provides diversification both it its wide product offerings and
geographically, making it the most attractive investment.



Recommendation


I recommend that you BUY Allegheny
Technologies, especially if it dips back down
below $30 per share.

Questions?