Allegheny Kept At Underperform

On August 27, we reaffirmed our Underperform recommendation on Allegheny Technologies (ATI). Our view reflects sustained weakness in its standard stainless products business, pricing pressure and a weak demand environment.

Why Retained?

The metal processor’s profit for second-quarter 2013, reported on Jul 24, tumbled year over year on lower demand across a host of end markets and weak pricing. Both revenues and earnings for the quarter missed Zacks Consensus Estimates. Allegheny saw lower sales across its businesses in the quarter. The company is focusing on cost optimization and is accelerating its cost reduction efforts.

Estimates for Allegheny are on the downswing following the release of the second quarter results. The Zacks Consensus Estimate for 2013 has gone down 63.5% to 35 cents per share. The Zacks Consensus Estimate for 2014 has also declined 27.6% to $1.55.

Allegheny, a Zacks Rank #4 (Sell) stock, is contending with a soft economy and raw material cost pressures. Reduced raw material surcharges and low base prices of standard stainless products are hurting the results of its key Flat-Rolled Products segment. Weak demand and increased Asian imports are contributing to lower stainless steel sheet plate prices.

Demand for Allegheny’s standard stainless products has been hit by rapidly falling raw material surcharges, resulting in customers delaying purchases. In addition, the same factors appear to be influencing short-term demand for some high-value products from some key end-markets as many customers are being cautious and keeping inventories lean.

Weak demand from jet engine aftermarket and nuclear energy is expected to continue to affect Allegheny’s results. Uneven domestic growth, slowing growth in China and weakness across Europe and Japan is also impacting demand from the construction and mining market.

Allegheny anticipates the business environment to remain challenging through second-half 2013 given the uncertain economic environment. Short lead time, softness across several end markets and a decline in surcharges are expected to continue to affect the results in the Flat-Rolled Products division in third-quarter 2013.

Other Stocks to Consider

While we prefer to stay away from Allegheny, other companies in the basic materials sector with favorable Zacks Rank are Nippon Steel & Sumitomo Metal Corporation (NSSMY), Ternium S.A. (TX) and Kobe Steel Ltd. (KBSTY). While Nippon Steel maintains a Zacks Rank #1 (Strong Buy), Kobe Steel and Ternium each hold a Zacks Rank #2 (Buy).

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