Wednesday, December 13, 2006

Calls of Note Part 2

- Merrill Lynch is raising their 2007 and 2008 estimates for Allegheny Tech (NYSE:ATI) from $6.55/sh and $7.50/sh to $7.05/sh and $8.00/sh, respectively. In addition, they are raising their Price Objective on ATI to $112/sh, which is based on earnings of $8.00/sh in 2008 and a 14.0x P/E multiple. This is in-line with its historic average, which indicates that ATI's P/E has varied from about 8x to 35x, with an average closer to about 15x. Firm is now more confident that margins will be stable due to a more robust commercial up cycle than their previous forecast.

ATI currently has 30% of its revenues generated from the aerospace market, which they believe will increase over the next several years. The ML Aerospace & Defense team recently raised their delivery forecasts for Boeing on continued robust demand for aircraft. ML expects the replacement cycle for the North American legacy airlines to begin mid-to-late 2007.

In addition, they firmly believe that the use of composites as the primary structure on Boeing's new twin-aisle, the 787, marks a dramatic and fundamental shift in the aerospace industry, as significant as the transition from wood to aluminum for airframe structures. Composites are lighter, stronger and more durable than aluminum alloys. From the perspective of an investor in ATI, composite aircraft require much higher levels of titanium than traditional aluminum aircraft, as is the case for the 787 that requires 10X that of traditional aircraft of its size.

Notablecalls: Note makes sense. Expect to see buy interest in ATI today. Would not overstay my welcome.

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