Titanium Metals Poised for a Turnaround

Titanium Metals (TIE) is poised to rebound after experiencing a near meltdown caused by the recession and significant delays by Boeing (BA) in development of their 787 Dreamliner. Deliveries of other aircraft will increase the demand for titanium for the next five years.

In July 2009, The Airline Monitor, a leading aerospace publication, issued its semi-annual forecast for commercial aircraft deliveries. Aggregate annual deliveries for both Boeing and Airbus are expected to reach record numbers of aircraft during each year from 2009 through 2013 (totaling at least 960 aircraft deliveries each year during the period). Forecasted deliveries for twin-aisle aircraft through 2013 have declined 4% from 1,450 to 1,390 since The Airline Monitor’s January 2009 forecast primarily due to production delays on the Boeing 787. Changes to production schedules for certain other commercial aircraft resulted in a 22% increase in forecasted deliveries of Boeing and Airbus single-aisle aircraft through 2013.

Based on the increases in number of aircraft there should be a net increase in expected titanium consumption over the next five years compared to The Airline Monitor’s January 2009 forecast for titanium consumption. Beyond 2013, projected aircraft deliveries remain strong as fuel efficiency and expansion of the global fleet in developing countries, such as Asia, provide key drivers of long-term demand for titanium within the commercial aerospace industry.

VSMPO-Avisma from Russia has 31% of the milled titanium market followed by TIE with 18%, Allegheny (ATI) with 16% and RTI with 7%.

The Company's net sales were $205.7 million for the second quarter of 2009 compared to $297.3 million for the second quarter of 2008, a decrease of 31% principally resulting from lower volumes and average selling prices. Average selling prices are lower due to competitive pricing pressures resulting from lower demand for titanium products and declines in raw material costs, primarily titanium scrap, which have contributed to lower selling prices for products under long-term customer agreements, in part due to raw material indexed pricing adjustments included in certain of these agreements.

Operating income of $15.6 million for the second quarter of 2009 was down from $68.8 million for the same period in 2008, primarily reflecting the effects of lower volumes and average selling prices for melted and mill products. In addition, the favorable impacts from declining raw material costs, primarily titanium scrap, on the Company's gross margins were offset by higher per-unit overhead costs resulting from lower production volumes.

Titanium Metals reported net income attributable to common stockholders of $8.6 million, or $0.05 per diluted share, for the quarter ended June 30, 2009, compared to $47.3 million, or $0.26 per diluted share, for the quarter ended June 30, 2008.

Fundamental Assessment

Fundamental	Review
Stock Review		Risk Factors
Sector	Industrial - Metal Manufacturing	Beta	1.5
Dividend Yield	1.37%	Insider Ownership	52.89%
Earnings Announcement	approximately 2-12 Nov 2009 before the market opens	Institutional Ownership	25.8%
Value Analysis		Growth Analysis
Return on Capital employed	13.5%	P/E Ratio	16.6
Earnings Yield	9.8%	PEG Ratio	n/a
Free Cash Flow Margin	15.2%	Enterprise Value/Free Cash Flow	12
Free Cash Flow Yield	6.8%	Quarterly Revenue Growth (yoy)	-30.8%
Cockroaches	none	Quarterly Revenue Forecast (yoy)	-40.3%

Value

Titanium Metals is experiencing a substantial drop in sales that affects all relevant fundamental measures. However, the company's ability to generate excess free cash flow is significant. Their free cash flow margin of 15.2% and their free cash flow yield of 6.8% are both quite good in normal times. The company has delayed several capital improvement projects to help conserve cash. However, they are benefiting from earlier capital programs that help to lower the company's operating expense.

The low Return on Capital Employed reflects lower revenue and Earnings Before Interest and Taxes (EBIT). However, the high Earnings Yield indicates the market is valuing TIE at a relatively low price for the EBIT it is producing. This is an indication that any rebound in sales will have a positive affect on the price of the shares.

Growth

Titanium Metals growth is held back by their falling revenues. Their P/E ratio reflects this. Their Enterprise Value to Free Cash Flow ratio indicates the company’s value has the potential to grow significantly when revenue growth turns up.

Conclusion

Once manufacturing of the new airliners from Boeing and Airbus begin in earnest, TIE should see their sales grow and with it their ability to generate free cash flow. Until then TIE is likely to experience volatility in its share price as investors try to anticipate when these important events start to have an impact on the company. Remember, the price of a company's stock tends to rise in anticipation of a significant change in the company's fundamentals, usually by six months or so.

We could see a pick up in sales once Boeing demonstrates it is getting close to being able to produce the 787. In addition, as the economy recovers, airlines will start to replace their less efficient aircraft with more fuel efficient, lighter weight planes that contain more titanium. Until then TIE will remain at a low price.

Key Drivers and Barriers

Drivers

Titanium Metals is being driven by:

1. The growing demand for high performance materials for aircraft (Boeing, Airbus and military) as well use of titanium in other products such as medical uses.

2. They are the only titanium company with operations in the U.S and Europe, both very important markets for titanium.

Barriers

Titanium Metals has created important barriers by:

1. Growing capacity in the important parts of the manufacture of titanium materials.

2. Their 18% market share that is the largest outside of Russia.

Risks

Titanium is susceptible to a slow down in spending within their markets, especially the United States, as well as a slow down in capital spending by their customers across the globe. Continuing delays in the construction of key airliners such as Boeing's 787 Dreamliner will negatively affect TIE's sales.

Guidance

Management at Titanium Metals does not offer guidance.

Other Considerations

Approximately 36% of the company's net sales originate in Europe where they have extensive manufacturing and sales operations.

As of July 29, 2009, the company had approximately $58.1 million available for repurchase of our common stock.

The Bottom Line

Eventually Titanium Metals will benefit from the growing demand for titanium materials for airline, military and other uses. The recent problems Boeing is having with their production of the 787 Dreamliner has delayed demand for TIE's products. Now that it looks like Boeing has ironed out their production problems and the economy begins to recover, airlines will replace their older aircraft for more fuel-efficient planes that contain more titanium.

Boeing is scheduled to fly the first 787 before the end of 2009. If that comes off as expected, then the first deliveries of the 787 will begin in late 2010. This means Boeing will begin to order more titanium in the early part of 2010 to meet their ramp up of production. Look to buy on dips in the price in anticipation of growing demand for titanium.

Comments

[learnmoney:]

So have you bought?

Sep 23 06:57 AM

[User 490534:]

It was great analysis. Few points u missed are the company has 0 debt and book value of 6.2. Its valued close to $4 above the book value, considering the company is still profitable in the worst of the downturn and huge potential for upturn. I can bet if BA rolls outs the new planes this year, this stock has upside of at least 50-100% in near future.

Sep 23 03:59 PM

[happyshorter:]

Interesting article.
This one I won't short any more that's for sure!
You mention Boing and Airbus, but there is also Bombardier, the world's No. 3 aerospace company.
I think that it's a BUY *now* , even if one has to tolerate some versatility: anyway, votatility is not a goal per se, but inevitable if a stocks turns around.
As soon as some good news come out for the 3 big, TIE will be already much more expensive than now.
IMHO

Sep 29 01:34 AM