Citigroup out positive on Allegheny Technologies (NYSE:ATI), raising price tgt to $83 from $80, noting the company's concentration in late/non-cyclical markets, and organic growth prospects. ATI's mix of specialty alloys and fabricated products are more differentiated and defensible than exchange-traded base metals, while operating margins and visibility into 2007/08 are superior to carbon steel. In a tough cyclical environment and following a searing "rotational sector meltdown," ATI would be the first Metals stock firm would buy, and the last one they would sell.
Firm highlights following catalysts:
* Stainless steel: Demand continues to surprise. The International Stainless Steel Forum (ISSF) recently raised its 2006 global production forecast to 27.8 mln T, up +14.3% YoY, with melting capacity at nearly full utilization. This reflects a strong capital goods cycle, and heavy investment in oil & gas production/refining, chemical plants, and India/China infrastructure. While surcharge hikes have been common, reflecting higher nickel input costs, ATI notched two base price increases during the seasonally-slow summer period.
* Electrical steel: Prices, volumes are rising. ATI is seeing strong shipment growth in grain-oriented electrical steel, which is used in transformers and power distribution equipment. This is being driven by the electrification of China, plus grid upgrades in the US. ATI is targeting 20% shipment growth in 2007, from 100 kT this year. Electrical steel transaction prices are climbing, as indicated by AK Steel (AKS).
* Proprietary 2003 alloy: Displacing high-nickel austenitic steels. ATI has been taking share with its proprietary, 2003 lean duplex stainless alloy (3% nickel) in offshore oil&gas and chemical processing applications that have typically been the province of higher-nickel 316 alloys (10% nickel). This material is stronger, more corrosion resistant, and cheaper in an era of +$10/lb nickel prices. This material recently achieved qualification under the demanding NORSOK Norwegian offshore oil&gas standards for use in welded pipe & tube.
* Titanium expansion: Taking flight. ATI is expanding aggressively in Titanium sponge and mill products, which should boost shipments from 25 mln lbs in 2005 to 44 mln lbs in 2008, and above 60 mln lbs longer term. This is arguably the most attractive growth market in Metals, driven by aerospace builds, broad- based industrial penetration of light metals, and burgeoning corrosion markets. Demand is likely to run at roughly 8% long-term, while supplies remain critically tight. ATI is ramping internal sponge capacity, at aerospace grades. The Phase I expansion is running at full power with 6 sponge furnaces running. The Phase II expansion is set for 1Q/07 and Phase
III for 1Q/08, while the greenfield Utah plant is in engineering. Current expansion plans through 2008 (not including the greenfield site) could be worth as much as $1.40 to EPS, or $18/share at a 14x multiple. It is important to note that Titanium currently accounts for only 20% of revenues.
Notablecalls: The whole metals sector was very strong yesterday. In case of any signs of continued strength ATI would be my first pick as Citi is really pounding the table on the recent darling that has been trading sideways for the last months.