On Thursday, Deutsche Bank initiated coverage on Allegheny Technologies Incorporated (NYSE:ATI) stock with a Buy rating and a $70 price target. The firm sees significant upside potential for the company, suggesting a 40% increase from current levels based on its alignment with high-quality aerospace stocks.
The coverage highlights Allegheny Technologies' resemblance to an aerospace stock, given its market exposure, growth outlook, margin profile, and capital allocation. The company is on track to achieve over 20% EBITDA margins and above 80% free cash flow (FCF) conversion, metrics that are comparable to those of other established players in the aerospace sector.
Despite acknowledging that ATI does not possess the same quality characteristics as some of its peers, Deutsche Bank anticipates the company will begin to close this gap as its Aerospace and Defense (A&D) mix is expected to increase, reaching an estimated 63% in 2024.
This shift is projected to contribute to a relative revaluation of ATI's stock, which currently trades at a discount to Howmet Aerospace Inc. (HWM (BMV:HWM)) on 2025 price-to-earnings, enterprise value-to-EBITDA, and FCF yield metrics.
Deutsche Bank also notes the potential for "discovery value" as the market's perception of ATI transitions from viewing it as a metals company to recognizing it as an A&D company. This reclassification is anticipated to unfold gradually and could serve as a catalyst for the stock's performance.
InvestingPro Insights
Allegheny Technologies Incorporated (NYSE:ATI) has been making strategic moves that resonate with the positive outlook from Deutsche Bank. According to InvestingPro, management's aggressive share buyback strategy and the company's strong return over the last three months, with a 21.4% price total return, align with Deutsche Bank's projection of ATI's growth potential. Additionally, analysts predict ATI will be profitable this year, further reinforcing the company's promising financial trajectory.
InvestingPro Data also reveals that ATI is trading at a low P/E ratio relative to near-term earnings growth, with an adjusted P/E ratio for the last twelve months as of Q4 2023 at 14.63 and a PEG ratio indicating potential undervaluation at 0.58. The company's liquid assets exceed its short-term obligations, suggesting a solid financial footing for upcoming challenges and opportunities. Moreover, ATI's stock is trading near its 52-week high, at 98.69% of this peak, reflecting market confidence in the company's prospects.
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