On June 19, we downgraded Allegheny Technologies (ATI) to Underperform. Our view reflects sustained weakness in the company’s standard stainless products business, pricing pressure and a weak demand environment.
Why the Downgrade?
The metal processor’s profit for first-quarter 2013, reported on April 24, slid year over year as sluggish economic conditions hurt demand for its products. Sales fell at a double-digit clip on weakness across a number of end markets and lower pricing. Earnings for the quarter matched the Zacks Consensus Estimate while sales miss.
Estimates for Allegheny have been declining following the release of the first quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 24% to $1.02 per share. The Zacks Consensus Estimate for 2014 has also declined around 16% to $2.14. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
Allegheny 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. Moreover, weak demand from nuclear energy is expected to affect Allegheny’s High Performance Metals segment through first-half 2013.
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.
Allegheny anticipates the business environment to remain challenging through first-half 2013. The uncertain economic environment given the concerns surrounding the U.S. fiscal policy and eurozone crisis is expected to continue to affect demand for the company’s products in the second quarter of 2013. Allegheny expects modest year over year improvement in sales and operating profit in 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 Kobe Steel Ltd. (KBSTY), Shiloh Industries Inc. (SHLO) and Angang Steel Company Limited (ANGGY). While both Kobe Steel and Shiloh Industries hold a Zacks Rank #1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).