How to Profit From Allegheny Technologies' Global Advantage

Includes: ATI
by: David White

Allegheny Technologies (NYSE:ATI) makes a wide variety of specialty metals, and it sells them “worldwide“. This last is important. Much of Europe may be having economic troubles for quite some time. In contrast 45 Asian countries’ economies are forecast to grow at 7.8%+ in 2011.

ATI operates in three different segments: High Performance Metals, Flat-Rolled Products, and Engineered Products. It produces a wide range of alloys and super alloys from a wide range of metals including: nickel, cobalt, titanium, zirconium, hafnium, niobium, iron, chromium, tungsten, etc. Importantly it services many industries that are performing well, and are likely to do so going forward. These include: “aerospace“, defense, “oil and gas“, “chemical process“, “electrical energy“, food equipment and appliances, electronics, computers, communications, “autos and trucks“, cutting tools, construction and “mining“, and “medicine“. The industries in quotes above have all been booming. Providing products for them should stand ATI in good stead for many years to come. It really does help to hitch your wagon to a bunch of winners, if you are going to be dependent on them.

ATI has a long history of outperformance in its industry. It seems reasonable to expect more of the same. Let’s look at some of the fundamental numbers just to make sure. The data in the table below come from Yahoo Finance and TD Ameritrade. 





1yr Analysts Price Target






Avg. Analyst Opinion




Price/Cash Flow


FY2011 EPS Growth Estimate


FY2012 EPS Growth Estimate


FY2011 Revenue Growth Estimate


FY2012 Revenue Growth Estimate


5 yr, EPS Growth Estimate per annum


Market Cap


Enterprise Value




Short Interest as a % of Float


Cash/Share (mrq)


Total Debt/Total Capital (mrq)


Quick Ratio (mrq)


Interest Coverage (mrq)


Return on Equity (ttm)


EPS Growth (mrq)


EPS Growth (ttm)


Revenue Growth (mrq)


Revenue Growth (ttm)


Annual Dividend Rate


Gross Profit Margin (ttm)


Operating Profit Margin (ttm)


Net Profit Margin (ttm)


Most of the above numbers look great. You can’t do much better than a 5 year EPS growth estimate per annum of 48.10%. With that kind of growth the FPE has a lot farther to run upward. The Net Profit Margin and the Return on Equity are perhaps the two most negative things in the table above. For now one might write these off as being artifacts of the recovery from the recession. Steel and metals were hit very hard in the recession. One would expect to see both these numbers increase demonstrably in the next 1-2 years. If that didn’t happen, it would then be time to worry. Right now is not that time. Many steel companies by comparison are not even profitable yet. ATI is a leader, not a laggard. The above numbers suggest that ATI will lead an investor to good profits for the next few years.

The two year chart below of ATI gives us some idea of the technicals:


ATI shows a strong uptrend. The stock has recently bounced off of its 200-day SMA. It is currently overbought on the Slow Stochastic sub chart. I am not sure I would pick this exact moment to buy. I might choose to wait until ATI is oversold or nearly oversold. However, I would consider averaging in as long as the market continues to look stable.

An alternative strategy might be to sell ATI $60 August puts for about $1.20. This yields a price of $58.80 if the stock is put to you at $60. ATI has only journeyed below its 200-day SMA for short periods of time in the last two years. The 200-day SMA is now very close to $60. If the stock were put to you at this price you would likely make money shortly thereafter. If the stock is not put to you, you can collect the premium for the options Aug. 19, 2011. If you feel more confident in the market, you could sell higher valued August puts. The $62.50 put carries a premium of approximately $1.95. The $65 put carries a premium of $2.61. For the money, the $62.50 put seems much less risky than the $65 put.

I am still very worried about the European credit crisis. I am also worried about sudden USD strength. A sudden unwind in the USD carry trade on a steady movement up in the USD would likely cause the U.S. equities markets to correct dramatically. ATI is a high Beta stock -- 1.72. It would likely fall dramatically.

I am further worried about the U.S. debt ceiling problems. S&P said it might cut the U.S. debt rating if significant cuts are not made to the budget at the time of the raise of the debt ceiling. If the S&P did this, it might cause the U.S. Treasury yields to rise. Higher Treasuries yields might translate into a higher USD. This might mean an unwind of the USD carry trade. All these worries make me prefer the put selling strategy for the moment. It means losses will be less if there are any, even if it means profits will also be less. At times like this you want to worry about retaining your money more than about increasing it. The put strategy would help you do this.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ATI over the next 72 hours.