Titanium Metals Corp: Will The Good Times Keep Rolling?

| About: Precision Castparts (PCP)

Titanium Metals Corporation (TIE), also known as TIMET, is one of the world's leading producers of high quality titanium metal products. Titanium is exceptional for its strength-to-weight ratio, corrosion resistance, and performance under high temperatures. It is most commonly used in aircraft engines and airframes. A rebound in aerospace and defense orders has fueled a staggering stock performance for TIE.

Speaking of fuel, the soaring cost of oil in recent years has encouraged orders for more fuel-efficient planes built with titanium. An impressive quarterly earnings report from Boeing (NYSE:BA) last week reinforced perceptions of a strong uptrend in the aerospace industry.

In addition to aerospace applications, other significant end markets for titanium include chemical and industrial power plants, desalination plants and pollution control equipment. There are also prospects for growth in emerging areas such as automotive parts, offshore oil and gas production, geothermal facilities, military armor, architectural applications, and some consumer goods.

Commercial aerospace is by far the largest end market for titanium. While the U.S. airline industry has been in rough shape for quite some time, international airlines are ordering a lot of new planes. TIMET's stock has soared over 400% since we wrote about it in 2005, split 2-for-1 twice since then, and is up from less than $0.25 (split-adjusted) in 2002.

TIMET's performance is amazing considering the dismal state of the aerospace industry through the early part of this decade. Aerospace accounts for about two-thirds of the company's shipment volume, but the stock market is a forward-looking beast and when the worst was over for commercial aerospace investors poured into TIE. The cycles for this industry are notoriously vicious and long, so now that things are going up the future looks bright for years to come.

Furthermore, government orders for military aircraft are on the upswing. After decades of cutbacks on defense spending, the past several years of military conflict around the globe combined with heightened terrorist activity has rekindled spending on military aerospace products as well emerging applications such as armor.

Emerging applications hold great promise for growth not to mention diversification away from the highly-cyclical aerospace industry. Emerging markets such as automotive parts and offshore oil and gas production are expected to drive double-digit growth in shipments for emerging applications. Another potential catalyst is demand for ethanol as an alternative energy source. Ethanol requires more corrosion-resistant pipelines so the current infrastructure will not do.

In addition to the "worst-is-behind-us" scene for the aerospace industry and the prospects for growth in other end markets, it should be recognized that the dramatic rise in TIMET's stock is also a reflection of how dire conditions were a few years ago. Its stock plunged from an unadjusted peak of $37.50 in 1997 to a low of $0.91 in 2002 before the company enacted a 1-for-10 reverse split in Feb 2003.

The company is expected to report earnings for 2006 of $1.22 per share, up 42% from $0.86 a year ago. That figure is seen rising to $1.54 in 2007, according to the consensus among the three analysts who cover TIMET. Revenue is forecast at $1.17 billion for 2006 and $1.35 billion in 2007.

Titanium Metals Corp. is not the kind of stock that appeals to risk-averse investors, but its association with the highly-cyclical aerospace industry and prospects for growth from new applications make it an interesting company to know. The stock has come a long way in the past few years, but the next several years should keep the good times rolling for this business.

TIE 1-yr chart

Disclosure: Author has no position in TIE.