Allegheny Technologies

Stock: ATI

Rating: Buy

Author: Waleed M. Tariq

The Company

  • ATI develops and distributes unique materials and components for aerospace & defense and energy, which account for 44% and 19% of MRQ sales.
  • The company creates cast and powder alloys and 3D-prints aeronautical components.
  • It has 2 reportable revenue-generating segments: High-Performance Materials & Components (41%) and Advanced Alloys & Solutions (59%).

Bullish

  • The company is growing due to a robust aerospace sector.
  • Accenture finds that 76% of aerospace executives predict revenue growth within 18 months.
  • The company keeps inventory to meet predicted demand and prevent supply chain interruptions.

Bearish

  • A recession may halt ATI’s end-user growth, making its backlogs outdated.

Growth potential

  • Strong demand in commercial aircraft and energy boosted MRQ gross margin to 20,3% from 12,4% in Q1 2021. Despite higher raw material costs, sales and cost-cutting enhanced gross margin in 2020.
ATI Earnings Presentation
  • Reports Accenture Aerospace executives estimate 18-month revenue increase of 76%. Researchers forecast a 10% CAGR for the jet engine market.
  • The company keeps inventory to meet demand and avoid supply chain interruptions.
  • McKinsey predicts electrification and higher living standards will quadruple electricity demand by 2050. ATI’s fastest-growing sectors should have strong fiscal years ahead.
Data by YCharts

Profitability

  • Growth and profits are up, but margins are low. ATI’s gross margin is 20.3%, below the 31.85% industry average. 3.7% net margin is below 21.33 and 8.78% industry medians.
  • The company has a forward EBITDA growth rate of over 40%, EPS growth CAGR of 140%, and forward FCF per share growth rate of 54.48.

Valuation

  • 16.5x P/E and 3.39x P/B are higher than peers’ 10.71x and 1.79x. Forward P/S and P/CF ratios are lower than 1.21x and 6.14x.

Conclusion

  • Despite 2022’s market downturn, the company’s aerospace and energy sectors are recovering, so I rated the stock a buy.