Allegheny Exposed To Flat-Rolled Challenges, Pricing Woes

On May 18, we issued an updated research report on Allegheny Technologies (NYSE:ATI) .

Allegheny swung to a loss on a reported basis in first-quarter 2016, hurt by restructuring & transformation charges related to workforce reduction as well as costs associated with work stoppage and the return to work of United Steelworkers (USW)-represented workers. Results were also affected by lower efficiency in operations due to work stoppage.

Adjusted loss was lower than the Zacks Consensus Estimate. Sales tumbled year over year on lower shipments and pricing, and missed expectations.

Allegheny continues to see certain challenges in its core Flat-Rolled Products segment. Revenues from this segment plunged roughly 55% year over year in the first quarter, hurt by lower shipments, reduced average selling price of all products and weak market conditions.

The Flat-Rolled Products division also posted a wider operating loss on a year over year basis in the quarter, hit by costs related to work stoppage and lower prices. The segment continues to be affected by low material prices, uncertain market demand and global overcapacity. Average selling prices decreased 16% for high-value products and 24% for standard stainless products in the quarter.

Weak demand and increased Asian imports are putting pressure on stainless steel sheet plate prices. Global excess capacity has resulted in unfairly traded imports into the U.S., mostly from China, hurting base-selling prices. Demand for flat-rolled products in industrial markets also remains somewhat weak.

Profits from Allegheny’s High Performance Metals and Components (“HPMC”) segment plummeted around 60% year over year in the first quarter, hit by lower operating rates owing to weak demand in the oil & gas/chemical and hydrocarbon processing industry and low operating rates at the company’s Rowley titanium sponge facility.

Depressed oil prices have created an uncertain demand environment for the company’s products in drilling applications in the oil and gas industry. Demand from the oil and gas market is expected to remain weak in the remainder of 2016. Allegheny also remains affected by continued softness in the global construction and mining equipment market.

Nevertheless, Allegheny anticipates its ongoing rightsizing and restructuring actions to have their impacts on the Flat Rolled Products segment in the second quarter. The company expects the division to be modestly profitable in second-half 2016 as it restructures the business to a higher value product mix. Moreover, re-negotiation of labor contracts is expected to lead to lower retirement benefit expenses for the balance of the year. The HPMC division is has also started to gain from the growth phase of the aerospace sector.

Allegheny currently sports a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked companies in the steel and metals space include Ryerson Holding Corporation (NYSE:RYI) , ArcelorMittal (NYSE:MT) and Olympic Steel Inc. (NASDAQ:ZEUS) . While Ryerson Holding holds a Zacks Rank #1 (Strong Buy), both ArcelorMittal and Olympic Steel carry a Zacks Rank #2 (Buy).


ARCELOR MITTAL (MT): Free Stock Analysis Report

OLYMPIC STEEL (ZEUS): Free Stock Analysis Report

RYERSON HOLDING (RYI): Free Stock Analysis Report

ALLEGHENY TECH (ATI): Free Stock Analysis Report

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