Is Allegheny Technology Heading For a Crash Landing?

Allegheny Technology Inc. (ATI) manufactures stainless and specialty steels, nickel- and cobalt-based alloys and super-alloys, titanium and titanium alloys, tungsten materials, and such exotic alloys as niobium and zirconium. The company's flat-rolled products (sheet, strip, and plate) account for a great majority of its sales. Its high-performance metals unit produces metal bar, coil, foil, ingot, plate, rod, and wire. Allegheny Technologies' largest markets include aerospace and electrical energy. More than three-fourths of its sales are in the US. ATI was formed from the 1996 merger of Teledyne and stainless-steel producer Allegheny Ludlum.

Almost every number you consider for ATI is extraordinary. Start with Return on Equity. In the last 12 months, it was 58.8%. Net Profit Margin is 12%. Earnings for 2006 should be $5.60 a share. This year look for $6.54. (An analyst at Prudential is looking for $8 a share in 2007.) Analysts are predicting the company will average 52.5% per year growth in earnings over the next 5 years. Not too hard to imagine since ATI reported per share gains for 2006 of better than 66% while sales were up more than 35%. In the most recent quarter, profits were expected to be $1.61 and the company reported $1.63. The P/E is a relatively modest 19 even with the stock being up 50% since October.

A large portion of ATI's total sales comes from defense contracts, up to 30% now, a gain of 50% over last year. It makes titanium mill products used in jet engines and airframes. Right now the demand is far outstripping supply. But what if peace breaks out?

In response to the titanium sponge demand, ATI is increasing capacity, a project that will take several years to complete. Phase One is done at the Albany, Oregon plant and running at a rate of 8 million pounds a year. Plans are for expansion to 16 million pounds a year by 2008. Another facility in Rowley, Utah is being built, and by 2009, the two plants will create 40 million tons of titanium sponge a year.

Other numbers: the stock was trading at $2.10 a share in 2003, only 4 years ago. Now it's over $100 as of this writing. While earnings are soaring, any investor has to wonder if such rapid growth is possible over an extended time frame. Traders will most likely love the stock, but not from the long side. Any time they see a move this rapid, their antenna start buzzing. Most stocks take a breather or have some mis-step before they head higher. While ATI pulled back to the low $60 range mid-way through 2006, it's been mostly straight up since then.

This stock has been a rocket over the last 6 months. There is definitely a shortage of titanium and prices will only go higher if demand stays where it is. While earnings are projected to be very strong, it's hard to believe those numbers aren't already in this stock, especially given its quick run up in the last two weeks. Citigroup has a price target of $124 for ATI, given the latest quarterly report.

If you own ATI, you'll want to check your price goal, given the current information. You may have already reached it. If you don't own it, you'll want to carefully study the numbers to determine if waiting is the better part of investing in this one.

Disclosure: Author has no position in ATI.