Titanium Metals: Margins Remain Under Pressure

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We are downgrading Delaware-based Titanium Metals Corporation (TIE) from Outperform to Neutral.

Titanium Metals is the world's largest supplier of high quality titanium metal products. All of the company’s revenues are generated from titanium operations, mainly in the US and Europe. The company has three sub-segments: Mill Products (billet, bar, plate, sheet and strip), Melted Products (ingot, electrodes and slab) and Other Titanium Products.

In the first quarter of 2010, Titanium Metals’ net earnings of 9 cents per share were significantly higher than the Zacks Consensus Estimate of 3 cents. We expect a strong pick-up in titanium demand in the long term, driven by higher defense spending from the government. The aerospace sector, Titanium’s key consumer market, has started showing signs of recovery. After a two-year delay, the Boeing 787 model from Boeing Company (NYSE:BA) completed its first flight in December 2009, which should drive demand for Titanium’s products.

Additionally, Titanium Metals’ products are finding new areas of growth in commercial aerospace, defense, energy and several other industries. Titanium is also being adopted in geothermal energy extraction and oil and natural gas production. Chemical processing, consumer and sporting goods are some of the other areas of growth.

Geographically, the rapid growth of China and other Southeast Asian economies has brought with it an unprecedented demand for titanium-intensive industrial equipment. We believe the aggregate demand from emerging markets could grow at a double-digit rate in the long term.

However, Titanium Metals’ margins remain under pressure due to low capacity utilization levels and downward price pressures. In 2009, the company’s major production facilities operated at less than 50% of its installed capacities. These plants operated at around 88% of capacity in 2006 and 2007 and 81% in 2008. The cyclical nature of the commercial aerospace industry, which represents a significant portion of Titanium Metals’ business, creates uncertainty regarding its future profitability.