Titanium Metals Is Going Down 50 comments
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TIE looks potentially great to the growth investor – low PE (15X 2008), rapid EPS growth (50% this year, 24% next year) and a stellar balance sheet (no debt, $1 billion of equity). A deeper look, though, shows a troubling build-up in inventories, unsustainably high margins and a weak chart. As you can see, the stock has been phenomenal:
That huge run has been fueled by a massive run in the underlying price of titanium. There are few suppliers, and TIE is the only pure-play. From what I can tell, there is supply coming onto the market beginning next year. In the meantime, sales growth has been decelerating, with inventories (over half the equity of the company at a whopping $546mm) growing more rapidly for the past two quarters. It is not surprising given the massive inventory build (over ½ the 2006 net income) and the build-up in PPE that free cash flow is negative. The margins [EBITDA] are pushing 40% - not too surprising to see more supply coming on. These levels are unsustainable in the long-run. Finally, the chart tells all:
33 is strong resistance now – use that as a buy-stop if you short the stock. The stock has failed at 40 earlier this year and has rolled over (medium-term moving average has cut through longer-term). I am targeting 25 initially, though the stock has considerably more downside if I am correct about slackening demand from China and the commercial aviation industry (both results of the capital crunch).
Some will take comfort in the high short-interest relative to the float, but I would point out that it is tame relative to daily trading volume (3 days). Others think that this could be an acquisition: Not in this new environment and not at these margins. This is text-book in my opinion and is very reminiscent of the tantalum run in the late 90s that fueled the stocks of AVX Corporation (AVX), KEMET Corporation (KEM) and Vishay Intertechnology (VSH) (cell-phones instead of airplanes).
Disclosure: Author is short the stock as of 8/22
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This article has 50 comments:
echotoall.com/blog/200.../
A few things though... revenue is hostage to capacity capabilities and pricing. back log is at a billion (consistent from last 2 quarters). reduced margins due to increase supply and wider use, but earnings growth is what we really care about. For the last few months there has been consistent insider purchases
google.brand.edgar-onl...
I can not really say these are BS purchases as they add up to a few million dollars worth. what do they see or know?
I urge you and any TIE long (believe me, I am hearing from them directly) to go back and review the history of AVX (or KEM or VSH) in the tech bubble. I listened to the presentations - tantalum capacitors were always going to be in high demand. Specifically, look at inventories and margin levels: where were they prior and where did they get to at the peak. This is a red flag situation in my opinion - capacity running full, adding capacity, yet inventory rising faster than sales.
IMO the market in general are over exended technically, in fact i shorted the market this morning for the short downward consolidation and TIE should go down with it. Seeing how it is a volatile stock the downward move maybe more exaggerated.
Also, in regards to Management buying. Harold Simmons made billions toward his beliefs, so if there is a belief there I will pay attention. But he is not the only one buying, multiple upper management is aswell.
Revenue is not growing faster because TIE runs at a 95% capacity, and the new capacity is not fully on line yet to increase revenue. There are only a few players in the space, and few high quality TI plays.
And be very careful using the term inventory. The raw material inventory DECLINED from 12/31/06 to 06/2007. Work-in-process inventory increased.
google.brand.edgar-onl...;Type=HTML
Money has flown (no pun intended) into all sorts of things of late, including anything related to China as well as related to the commercial aviation theme. Easy money has fueled expansion in China and easy money is history. When T-Bills yield 3%, you need to pay attention. Airplanes are very expensive - no one pays cash for them. The credit markets have seized up. Look back to Calpine as a great example. Everything that they said about demand was true, but they didn't have access to capital. Yes, China wants to grow, but it is time for a pause.
I find it frightening that a company is running at full capacity yet is piling on WIP. Believe me, orders are orders, not sales. Try looking out beyond a quarter or two and imagine what the orders will be like as capital is in short supply.
analystforhire.com tell me another good story.
Also, when you say that I have done it again, what do you mean? I know not all of my calls are great, but I have had some good ones. I am not sure that the bad ones were due to "incomplete research". Thanks for enlightening me.
This is the most stupid statement I have ever read.
Alan Brochstein: "I am confident will get hit hard are the materials companies that are Chinese demand plays"
BHP CEO would disagree:
"BHP said in a statement yesterday that, despite moderating U.S. economic growth, the outlook for the global economy remains positive, supported by solid economic activity in Asia and Europe.
"Asian economies, led by China, continue to demonstrate strong growth. India's economy continues to gather pace... In Europe, solid growth is being supported by accommodative monetary conditions, rebounding consumption, and strong German industrial activity," the statement said.
The miner added it expects Chinese gross domestic product growth at 10% in 2008 "with risks remaining to the upside."
The increase in inventory is secondary to an increase in work-in-progress inventory, meaning TIE is working on more orders right now and that will translate into higher revenue and EPS next quarter.
TIE Inventory - Work In Progress
2nd Qtr. 06/30/07 - 269 Millions
1st Qtr. 03/31/07 - 224 Millions
In addition, titanium selling prices are increasing (you are incorrectly looking at Chinese low grade titanium spot prices) secondary to the increasing demand from the aerospace & defence industry
TIE melted product shipments average selling price (per kilogram y/y) $38.25 (Q2-2006) $42.20 (Q2-2007)
TIE mill product shipments average selling price (per kilogram, y/y) $55.25 (Q2-2006) $69.65 (Q2-2007)
How is it possible to have softer demand (according to you B.S. article) and higher selling prices?
The Panic of 2007 is not a problem caused by lack of liquidity. It is a temporary problem caused by lack of credibility. (rating agency credibility)
Again, Alan Brochstein has made multiple none-factual without any evidence claims with the intention to reduce the stock's price that he had sold short one day prior to posting this garbage.
I cannot believe Alan Brochstein calls himself an analyst.
A self-serving day-trader pretending to be an analyst would be more appropriate.
Alan Brochstein please do some math before making contradicting the facts preposterous statements
2nd qtr 2007 518 3% over prior
1st qtr 2007 501 2% over prior
4th qtr 2006 489 12% over prior
3rd qtr 2006 436 9% over prior
2nd qtr 2006 400
You shared some inventory numbers, though they were off by one quarter. The actual numbers are: 546 for Q2 and then all of your numbers. While we day-traders must be different from expert analysts like you, I tend to look at year-over-year. Inventories are up 25% last quarter and 29% in the prior quarter, while sales were up 13% last quarter and 19% in the prior quarter. So, yes, inventory growth has been high in the past two quarters relative to sales.
As far as the margins, I have no clue where you get your data from. Still, though, yes, I would short the whole industry. I use StockVal, and the EBITDA margin (trailing 4q) is 40% for the company, while RTI is 28 and ATI is 23. The S&P 500 is more like 21%. But none of that was really my point. High margins induce competition and more supply, which serves to reduce margins over time. This is a cyclical, capital intensive industry. Margins of 40% aren't common. In fact, looking at pre-tax margins, the median over the past 15 years has been slightly negative. The peak of 36 in Q1 was well above the peak of 21 in 1998 just before the Asian crisis. ATI over 12 years has had a median of 9, while RTI over 25 years has been under 5. Over the past 7 years, the medians are 3 for TIE , 3 for ATI and 7 for RTI.
If you compare TIE gross margins (38.36%) to the industry margins (44.12%) or to S&P 500 margins (44.80), you will realize that TIE margins are not too high and very much sustainable. Alan Brochstein had to fabricate something and it is always easy to say that the margins are not sustainable (you can say it about almost any company if you need to come up with something negaqtive). According to Alan Brochstein, the margins of the entire industry are unsustainable and should be shorted.
Moreover, TIE titanium volumes will explode exponentially when A380 and 787 will go into mass production next year. You do not even realize how much more titanium will be needed for these two projects. In addition, TIE has LTA with Rolls Roys, both 787 and A380 use Rolls Roys engines.
(An important milestone in the launch of the 787 was the certification of the Rolls Royce Trent 1000 engine on August 7, 2007 by both European and US regulators. The engine has 7 different variants and 1000 orders have already been placed. It is the first engine to be certified for use on the Boeing 787.)
This is only the beginning of the titanium boom. TIE insiders know it and accumulate the shares like crazy.
The last time we had a credit crunch (1998) that zapped the ability of developing countries to borrow money, it killed this stock. I have written about my belief that we are in a much worse environment now. This stock is very vulnerable to a recession. Yes, most of the data absent the inventory build, which can be explained to some degree, is strong now, but it is only through June. The world has changed greatly this summer, and those who fail to incorporate those changes into their analysis will be stuck holding the bag. The three titanium stocks, like many metal stocks, have rolled over. Interestingly, of the three, TIE has the worst chart - it was unable to extend its high from 2006. Perhaps it is the higher margins, perhaps it is the higher PE, perhaps it is the higher inventory levels and growth, or perhaps it is the higher capital intensity (sales/(net working capital + net PPE). In any event, this looks like a wounded duck to me.
The level of your incompetence is just simply laughable. This is unbelievable that SeekingAlpha allows you to pretend to be an analyst and to post such incompetent garbage.
How it is a change from 518 to 546 translates into 25%?
Let me help you with this second grade math: the difference between 518 and 546 is 5.4% (not 25%); and 502 and 518 is 3.2% (not 29%)
In addition to being a self-serving day-trader pretending to be an analyst, you are also either an incompetent analyst-pretender or simply a liar.
Here are the facts:
Inventory - Finished Goods: 106 (q2-2007) 106 (q1-2007) 90 (q4-2006) 83 (q3-2006) 76 (q2-2006) Inventory - Work In Progress: 269 (q2-2007) 245 (q1-2007) 239 (q4-2006) 226 (q3-2006) 210 (q2-2006)
Inventory - Raw Materials: 152 (q2-2007) 144 (q1-2007) 154 (q4-2006) 163 (q3-2006) 133 (q2-2006) Inventories - Other 20 (q2-2007) 23 (q1-2007) 18 (q4-2006) 18 (q3-2006) 18 (q2-2006)
Total Inventory: 546 (q2-2007) 518 (q1-2007) 502 (q4-2006) 489 (q3-2006) 436 (q2-2006)
From this data even a second grader can see that there is NO, ZERO, ZILCH increase in inventory of the finished goods during last two quarters.
As I said above the increase in total number is secondary to an increase in Work In Progress Inventory and Raw Materials Inventory secondary to TIE working on higher volume of orders right now (TIE has added new capacity in Q2-2007 ) and that will translate into higher revenue and EPS next quarter.
Next margins (Reuters):
TIE Gross Margin (TTM) – 38.36%
RTI Gross Margin (TTM) – 35.01%
Industry Gross Margin (TTM) – 44.12%
S&P 500 Gross Margin (TTM) – 44.80%
Next ATI is a steel company with only 20% titanium component, 80% of ATI revenue is specialty metals like stainless steel; therefore comparing a steel company to a titanium company is like comparing oranges to apples. (The real analyst would know that ATI belongs to a different industry, but the incompetent and self-serving day-trader pretending to be an analyst has no clue)
Seriously, there is so much of overwhelming evidence supporting that you are not an analyst. SeekingAlpha should check your credentials, if you have any...
Your defensive tone, laden with disrespect for opposing views, is very uncharacteristic for Seeking Alpha. You may disagree with my conclusions, but your personal attacks are not worthy of being published on this site. Please refrain from your name-calling, as it serves little purpose and, quite frankly, diminishes from your argument.
As far as 2nd grade math, I am comparing sales growth and inventory growth (as I mentioned previously) to the YEAR-AGO levels. So, 546 is 25% above the 437 from a year ago, while sales are up just 13%. Before you criticize my math skills (I majored in math, by the way), check your own. You state that there was "ZILCH increase in inventory of finished goods during last two quarters". If I take your numbers, though, that is incorrect. You stated that it was $90mm at year-end and $106mm at mid-year. Where I come from, that is a $16mm increase or 18%. The quarterly run-rate in sales increased by under $18mm in that same time-frame. This is a red flag in my opinion. If orders ever get pushed out (and I fervently believe that they will due to the developing global credit crunch), then the P&L will pay the price with lower margins.
On the margin front, you have failed to read what I have written. I am not using gross margin - it is too high up on the income statement and irrelevant. It is the operating margin that matters (takes into account not only costs but expenses). This business is highly leveraged - operating expenses are just 5% of sales. R&D is trivial. To compare the GM to the overall market is silly in my opinion. My point is that pricing and unit volume growth have created off-the-charts operating margins. I am aware of the differences between pure-play TIE and ATI. My point is that for ALL metals companies, we appear to be at unsustainably high margins.
If you insist on looking at GM, keep in mind the following:
TIE GM:
2007-Q2=40, 2006=37, 2005=27, 2004=13, 2003=1, 2002=2, 2001=7, 2000=1, 1999=5, 1998=23
(I know it will be your next question so I will answer it before you make another silly statement)
Because TIE holds multiple titanium alloy patens, Rolls Royce have signed a 10-year agreement with TIE for titanium engine parts used exclusively in Rolls Royce energy efficient new engines (Rolls Royce Trent 1000). TIE has a pricing power because only TIE can make this titanium alloy, no other titanium company in the world can produce this alloy; hence TIE higher margins.
Inventory - Raw Materials q/q (2006/2007) is 14% because again TIE has added new capacity in Q2-2007 and has higher orders-in-progress volume that will translate into higher revenue and EPS next quarter.
You are getting confused in your distorting the facts pseudo-analysis because you keep comparing cell phones with airplanes.
The Operating Margin shows us how much of each sales dollar is left over after subtracting direct costs of generating the sales and indirect costs, such as corporate overhead.
TIE Operating Margin (TTM) - 33.51%
Industry Operating Margin (TTM) - 34.99%
Net Profit Margin that tells us what percent of each sales dollar has been brought to the bottom line after subtracting all costs of any kind.
TIE Net Profit Margin (TTM) - 25.86%
Industry Net Profit Margin (TTM) - 22.89%
Again, Alan Brochstein has made cherry-picking the data pseudo-analysis (omitted comparing Operating and Profit Margins to the industry) with the intention to reduce the stock's price that he had sold short one day prior to posting this pseudo analysis article.
1. Mr. Brochstein erroneously (intentionally?) compares Titanium Metals with “cell-phone” industry. Mr. Brochstein fails to see that there are fundamental differences between the industries and that one needs to compare a company to its industry
2. Mr. Brochstein incorrectly looks at inventories of work-in-progress and at raw materials inventories to makes his erroneous conclusions. Mr. Brochstein does not realize that in this industry inventories of work-in-progress and raw materials inventories historically (since 1955) have been higher that in “cell-phone” industry. Mr. Brochstein fails to recognize that the revenue (sales) of TIE consist of finished goods (not of raw materials).
3. Mr. Brochstein makes preposterous statements about a year-over-year increase in Titanium Metals inventory of finished goods by 30 millions (from 76mm to 106mm) as “a troubling build-up in inventories” and fails to recognize that TIE revenue from the sale of finished goods over the same period was more than 1200 million. An increase in inventories by 30 million year-over-year for a company that has sold more than 1200 million of finished goods over the same period is less than peanuts (30 vs. 1200)
4. Mr. Brochstein makes preposterous statements about “this business is highly leveraged” and fails to recognize that TIE has no debt and positive cash on its books
5. Mr. Brochstein erroneously (intentionally?) fails to take into the account that TIE has been adding additional capacity, 100 million of CapEx during 2006 and 47 million so far in 2007 (funding these expansions by cash from its positive cash flow)
6. Mr. Brochstein erroneously (intentionally?) fails to recognize that “the margins [EBITDA] are 40%” is the result of TIE selling the property; therefore one needs to look at TIE operating and net margins, but Mr. Brochstein intentionally cherry-picks erroneously and misleadingly higher EBITDA margins.
As Mr. Levetti has pointed out TIE operating margins are inline with the industry and TIE net profit margins are in line with the industry and S&P 500
“TIE Operating Margin (TTM) - 33.51%
Industry Operating Margin (TTM) - 34.99%”
“TIE Net Profit Margin (TTM) - 25.86%
Industry Net Profit Margin (TTM) - 22.89%”
7. Mr. Brochstein erroneously (intentionally?) fails to recognize that Titanium Metals Co. holds multiple patens and LTAs, as a result has a pricing power and TIE margins are slightly higher.
8. Mr. Brochstein makes statements about “the evolving global credit crunch” without providing any evidence that such liquidity problems really exist / developing. Panic in the financial markets
9. The entire Mr. Brochstein analysis is standing on unrealistic assumption that “the commercial airline boom could come to a screeching halt”. Mr. Brochstein makes unrealistic predictions that people will stop flying and buying airplanes because of some imaginary “global credit crunch”
10. Mr. Brochstein unethically and illegally shorts stocks and on the following day publishes such misleading articles with the intention to reduce the stock's price that he had sold short one day prior to the posting. Mr. Brochstein erroneously (intentionally?) fails to recognize that such practices violate U.S. securities laws and Seeking Alpha policies. Mr. Brochstein should be reported to the SEC.
By the way, "Mr. Swanson" (if I may call you that, Mr. Levetti), your points again have factual errors:
Inventory didn't increase just $30mm, it increased $110mm. 546-446 is 110.
As far as being leveraged, I didn't state that it was financially leveraged, it is operationally leveraged. This is a high fixed-cost business - almost every incremental penny of sales (above input costs) drops to the bottom line. If pricing declines, the hit to earnings is substantial. refer to the historical margins over the past 10 years.
Your margin argument makes no sense. Sold the property? The analysis is the same at pre-tax - I shared those numbers in a comment above.
As far as your ethical statements, what you are saying is preposterous. First, I declared that I am short (it is such a small amount it is a joke) - there is no duplicity here. Second, I don't believe that my writing has any influence at all on the price. I love the forum that this provides, but it isn't Barron's. Third, if I am short a stock, when can I write negatively about it? In your strange legal view of the world, I suppose never. Fourth, why do you (and Mr. Levetti) even insist that I shorted it the day before? In my original article, I stated that as of 8/22 I was short, not that I shorted it on 8/22. Does it even matter though? Before accusing me of violating Seeking Alpha policies, I suggest that you read them.
2. Disclosure of Positions
Authors agree to disclose the existence at the time of writing of a long or short position (including stocks, options or other instruments) in any stock mentioned in an article. The suggested form of disclosure is to add the following to the bottom of articles: Full disclosure: Long GOOG at time of writing.
Authors may not write about a stock with the intention to boost or reduce the stock's price and sell (or buy) the stock into the resulting strength or weakness.
If the author intends at the time or writing to sell or buy a stock within three days of publication of an article that discusses that stock, the author must disclose this.
I have noticed over the years when someone foams at the mouth like Levetti or "Swanson", they usually are underwater longs in love with the story. I beg to differ. I may be wrong, but I see an environment that could drop the margins dramatically on this company. The market is already voting - the stock has rolled over.
"I have noticed over the years when someone foams at the mouth like Levetti or "Swanson"
These statements are as preposterous and obnoxious as your article.
Moreover, you have again violated multiple Seeking Alpha policies in addition to using obscene language and insulting me.
Please read Seeking Alpha policies again
1. Authors must substantiate any claims - "if I may call you that, Mr. Levity"
2. Authors may not write about a stock with the intention to boost or reduce the stock's price
3. If the author intends at the time or writing to sell or buy a stock within three days of publication of an article that discusses that stock, the author must disclose this. You shorting the stock one day prior to submitting the article were not disclosed.
Here is the truth about Titanium Metals and future growth prospects.
"The Company's sales order backlog at the end of June 2007 was $1.0 billion compared to $1.0 billion at the end of March 2007 and $0.9 billion at the end of June 2006.
Steven L. Watson, Vice Chairman and Chief Executive Officer, said, "We continue to see long-term favorable demand trends across all of our primary markets. Our facilities are operating at high capacity levels that improve cost efficiency, contributing to our record levels of operating income. While our near-term focus remains on maximizing our existing productive capacity through initiatives that emphasize efficiency, innovation and technological advances, we are also continuing our efforts to expand our productive capacity across all areas of our manufacturing operations. We are committed to maintaining the certainty, quality and reliability of supply to service the expanding needs of our current and prospective customers.
"Our 4,000 metric ton Vacuum Distillation Process ("VDP") sponge expansion in Henderson, Nevada commenced commercial production in April 2007, and we expect to be operating at full annual capacity of approximately 12,600 metric tons by the end of the third quarter of 2007. As part of our plans to assure our future supply of raw materials, we are continuing our design, engineering and site selection for a new VDP premium-grade sponge facility. We are also continuing to explore and pursue additional third-party long-term sources of sponge and scrap.
"Our electron beam cold hearth ("EB") melt capacity addition in Morgantown, Pennsylvania of approximately 8,500 metric tons, annually, is on schedule for an anticipated completion date of early 2008. We also commenced efforts to add a similar EB furnace at our Morgantown, Pennsylvania facility, scheduled to be completed in the last half of 2009. During 2007 we have also commenced construction of additional vacuum arc remelt ("VAR") capacity additions at our Witton, Morgantown and Savoie locations, all of which are expected to be completed by the end of the second quarter of 2008. Upon completion, these melt capacity additions will increase our EB melt capacity by approximately 107% and will increase our VAR capacity by approximately 34%. As we continue to adjust our long-term business plan in response to industry trends, we will consider more additions to our melt capacity based on our raw material sources and product mix.
"We have numerous other capital projects in process to improve and expand our productive capacity for scrap recycling and production of mill products. We also continue to evaluate opportunities to enter into long-term conversion agreements with third parties to address certain areas of additional or expanded manufacturing requirements as an alternative to the addition or expansion of our internal manufacturing capacity. Our ongoing and planned expansions of sponge and melt capacities, as well as our efforts to expand our key relationships with third-parties, allow TIMET to remain positioned to effectively utilize available resources to strategically invest in our business to achieve profitable growth and return on invested capital. We continue to emphasize initiatives that will increase our participation in downstream value-added products and services which are expected to provide strong operating results."
www.timet.com/index_ne...
TIE investors are "Tie"red, I would imagine. The stock has been struggling for over a year now despite "fantastic" numbers and a seemingly optimistic outlook. Perhaps I should have addressed the entire industry, as the problems I see at TIE are industry-wide for the most part. I reiterate every point that I made in this article and I invite anyone who wants more information to contact me by email.
It is obvious that the Code of Ethics and Standards of Professional Conduct does not exist for Alan Brochstein. It shames our great profession to see Alan Brochstein writing such deceptive articles, serving to further his own selfish interests and disregarding the facts.
Titanium Metals Corp. (TIE 30.35) has been overlooked by many investors amid the wave of merger activity in the metals industry in the past year. However, the Dallas-based company has strong long-term growth prospects and continues to benefit from increasing demand for its products from commercial aerospace companies and other major industrial markets.
Along with titanium sponge (primary titanium), Titanium Metals makes melted, mill, and fabricated titanium products, which are used primarily by commercial and military aircraft manufacturers, as well as the power generation, automotive and sporting equipment industries.
Titanium Metals' impressive list of customers, which includes Boeing Co. (BA 98.54), Rolls-Royce and United Technologies Corp. (UTX 73.72), use titanium for applications ranging from jet engine components to pipe fittings to golf clubs. The aerospace industry, however, accounts for well more than half of the company's business.
As highlighted in our view on the Basic Materials sector, a global spending spree has driven orders for commercial aircraft from Boeing and Airbus. Improved financial conditions of the U.S. legacy carriers and ongoing industry consolidation could extend the bull cycle as other areas start to cool.
Meanwhile, defense spending remains at a high level given the ongoing conflicts in the Middle East, as well as homeland security efforts and the Army's modernization and refurbishment. The defense budget is approximately 3.7% of GDP, and is expected to remain at elevated levels, which should support further growth for defense contractors and subsequently Titanium Metals.
Second Quarter Results
Earlier in August, Titanium Metals reported a higher second quarter profit that matched analysts' expectations, as a positive shift in product mix offset declining shipments for melted and mill products due to the effects of production delays in certain commercial aircraft and other adjustments to building schedules of certain customers.
Specifically for the period, the company posted earnings of $76.3 million, or $0.42 per share. That was up 41% from $54.3 million, $0.31 per share, a year earlier, and in line with analysts' expectations. Revenue, meanwhile, rose 13.4% year/year to $341.2 million, but fell short of the consensus estimate of $356.6 million.
The revenue shortfall was due to a decline in both melted and mill shipments, but was mitigated by higher average selling prices due to a favorable shift in mix to a greater proportion of aerospace grade sheet and plate. The higher value product mix helped contribute to stronger margins in the period. Gross margin improved 70 basis points to 39.7%, despite higher cost of sales associated with higher raw material and production costs, while operating margin improved 60 basis points to 34.6%.
Overall, the latest results still reflect solid industry fundamentals and continue to support a long-term favorable trend in demand for Titanium Metals' products across all major industry market sectors, which have favorably impacted melted and mill titanium prices.
The company expects overall capacity utilization rates to remain high for the remainder of the year and it intends to continue to explore other opportunities to expand existing production and conversion capacities through internal expansion, as well as through joint ventures and acquisitions.
Positive Outlook
As demand for Titanium Metals' products remains strong from commercial aircraft manufacturers, defense contractors, and other industrial companies, investors have the opportunity to pick up shares of the company on the cheap, after a recent decline in prices. Since reaching a 52-week high in May, shares of Titanium Metals have fallen roughly 22% due to worries that the company would miss second quarter expectations, as well as broader economic concerns and headline risks.
However, such worries have been greatly exaggerated. The stock is still up about 20% in the past twelve months, and approximately 5% since the beginning of the year. With recent risks already reflected in the current price, the stock remains well-positioned for further appreciation.
The stock is trading at a forward multiple of 15.1x earnings and sports a favorable P/E to growth ratio of 0.76. Furthermore, Titanium Metals has been rumored as a takeover candidate in recent months, amid the frenzied merger activity in the sector, which could also bode well for investors. The company has a return on equity of 36.74% and has no debt, and roughly $23.4 million in free cash flow.
What is your response, Mr. Brochstein?
PRICE TARGET IS $62
"Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth. Titanium Metals' current Price Target is $62 (+42% from the 2006 Target of $44 and +97% from the 08/31/07 price of $31.35). This dramatic rise in the Target is the result of a +79% increase in the equity base and a +21% increase in the price/equity multiple."
https://commerce.us.re...
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By Thomas M. Anderson (Kiplinger's)
Newcomers are headed for an airport near you. The Airbus A380, currently the world's biggest passenger aircraft, made its maiden voyage March 19. The behemoth can seat as many as 555 passengers. Not to be outdone, rival Boeing plans to launch the 787 Dreamliner, a large, fuel-efficient carrier, by May 2008.
Whether Airbus or Boeing rules the skies, the manufacturers will need more titanium. The metal will account for about 22% of the total weight of the Boeing 787. To produce a single A380, Airbus requires about 77 tons of titanium, which is as strong as steel, about 45% lighter and corrosive resistant.
Don't expect the boom to fizzle, says Banc of America analyst Kuni Chen. Aircraft orders and industrial demand from China will keep titanium supplies tight for at least the next three years, he says. The sustained need for the light-weight metal presents opportunities for investors. Among the three publicly traded U.S. titanium producers - Allegheny, RTI International and Titanium Metals -- Chen sees Titanium Metals (TIE) as the clear winner.
Titanium is produced in three basic steps. First, the ore is reduced into a porous "sponge" form. Then, titanium sponge and scrap is melted down to form ingot. Finally, that ingot is milled to make billets and bars. While the capacity to produce sponge should grow rapidly with demand, the capacity to melt and mill titanium will be a bottleneck, Chen says, and he expects the market for milled products to remain tight for several more years. Chen estimates that aerospace manufacturers have a backlog of more than 5,000 aircraft and will require more titanium production to fulfill those orders.
Among its competitors, Titanium Metals is in the best position to take advantage of higher prices and stronger demand, Chen says. Only 39% of Titanium Metals sales are under long-term price contracts while more than half of RTI's sales and about 70% of Allegheny's sales are under contact. That means that if titanium prices increase, Titanium Metals will benefit more from the rise than its rivals. Chen sees existing Titanium Metals contracts being renewed at higher rates and new contracts won on better terms because of increased demand.
Just to keep up with Boeing orders, Titanium Metals will have to boost production in its mills by 50% over the next two years, Chen says. He forecasts that Titanium Metals will generate more cash from its operations than Allegheny and RTI and use the money to expand its production.
Brochstein, do you know that virtually all the commercially significant, proprietary alloys developed in the past 25 years have been invented and patented by Titanium Metals labs?
"TIMET's technical laboratories in Henderson, Nevada and Witton,
England comprise the most extensive dedicated titanium research and
development facilities in the world.
Our internationally-recogn... labs have superior, proven capabilities
in developing new alloys, applications, products, and melting and
processing techniques. In fact, TIMET labs have been responsible for a
wide array of 'firsts,' including the continuous leaching process for
sponge production, consumable-electrode vacuum melting and continuous
sheet rolling.
Virtually all the commercially significant, proprietary alloys
developed in the past 25 years have been invented by our labs.
TIMET labs also support our manufacturing plants. Chemists and
research engineers consult with plant metallurgists on manufacturing
processes to assure the highest quality, optimize yields and minimize
costs, to ultimately benefit TIMET customers.
Both existing and potential customers benefit from our wealth of
technical experience in aerospace, industrial and emerging
applications. We devote significant time resources to answering
technical questions, by drawing on a large private library of
published and proprietary titanium articles. We welcome collaborative
programs aimed at solving specific customer problems and reducing
production costs.
The Henderson Technical Lab is located adjacent to our primary sponge
manufacturing plant and alloy melt shop, in Henderson, Nevada. It
functions as our alloy and product development center, provides sales
and marketing assistance and offers toll contract services.
To manufacture small quantities of titanium alloys for customer
evaluation, quickly and with complete confidentiality, our pilot scale
melt and forge facility houses the industry's most complete small-
scale VAR melt shop. HTL is capable of producing small 'button' melts
of 0.5 lbs and ingots ranging from 6" diameter weighing 15 lbs to 18"
diameter weighing 1800 lbs, in customer-specified compositions.
Pilot scale finishing services include forging (250 ton press), hot
and cold rolling (up to 7" wide flat, 1" diameter round), heat
treating, machining, pickling, chemical analysis and mechanical
testing.
Our research scale melting, forging and rolling equipment is also used
in process improvement trials and evaluations.
For corrosion analysis, we assist in material selection and perform
failure analysis and in-situ evaluations. Our corrosion lab offers
uniform, crevice, pitting, stress corrosion and hydrogen absorption
testing. For electrochemical studies, we perform AC Impedance and DC
Polarization testing. ICP, DCP, AA and Gas Analysis testing, as well
as routine and 'one of a kind' analytical services, are also
available.
Additional equipment includes Scanning Electron Microscopes with micro-
analytical capability and full metallographic preparation equipment.
Any of HTL's services can be quoted as toll contract work and many of
these services are free to TIMET customers."
Read about TIE R&D under Company Structure on their website:
www.timet.com/index_ne...
Say what???
Brochstein, you are ill-informed.
Read: "Titanium Metals Capacity Will Double by 2009" by Frank Haflich, American Metal Market
"Timet adds another phase in melt boost"
amm.com/2007-08-08__19...
Titanium Metals Corp., already mapping greenfield expansion of its
sponge capacity, has committed to another phase of melt additions
beyond what's already being installed, both in this country and
overseas.
Even before a new electron beam (EB) cold-hearth furnace is completed
at its Morgantown, Pa., plant, Dallas-based Timet has begun work on
another EB furnace, the company said this week. Moreover, it also is
looking to increase its vacuum-arc remelt (VAR) capacity with
additions in the United States as well as in Britain and France.
"We continue to see long-term favorable demand trends across all of
our primary markets," said Steven L. Watson, Timet's vice chairman and
chief executive officer, noting that Timet's facilities are "operating
at high capacity levels."
In Morgantown, where Timet is already adding an 8,500-tonne (18.7-
million-pound) EB furnace due for completion in early 2008, Watson
said yet another, "similar" EB furnace will be built by the second
half of 2009.
Moreover, VAR capacity boosts are planned not only at Morgantown but
also at Timet's facility near Birmingham, England, and at its 70-
percent-owned Timet Savoie SA operation in Ugine, France.
Timet did not specify how much new ingot and slab capacity the new
melt additions will represent, and a spokesman didn't return a phone
call seeking further comment. But whereas the company's previously
announced melting additions were billed as raising its EB capacity by
54 percent and its VAR capacity by 20 percent, the newest projects
will push these increases to about 107 percent in EB and approximately
34 percent in VAR.
Moreover, in a filing earlier this year with the U.S. Securities and
Exchange Commission, Timet said its worldwide melting capacity
amounted to about 44,650 tonnes (98.4 million pounds), or an estimated
20 percent of world capacity. Of this global melting capacity, around
35 percent was represented by EB furnaces and 63 percent by VAR. Its
melt operations, which ran at 90 percent of capacity last year, are
expected to reach 95 percent in 2007.
Meanwhile, Timet is continuing design, engineering and site selection
for a new vacuum-distilled process (VDP) sponge plant, even as its
existing VDP facility in Henderson, Nev., has completed a 4,000-tonne
expansion that has raised the facility's annual capacity to 12,600
tonnes (about 27.8 million pounds), an annualized operating rate set
to be reached by the end of this quarter.
The location of the new sponge plant, which Timet earlier said would
have an annual capacity of 10,000 to 20,000 tonnes (about 22 million
to 44 million pounds) per year while allowing for further expansion,
is expected to be announced later this year.
Watson said that, beyond the new additions, Timet will not only
consider more melt capacity but has "numerous other capital projects
in process to improve and expand our production capacity for scrap
recycling and production of mill products." It's also evaluating
opportunities for long-term conversion agreement with third parties
"as an alternative to capacity expansion." Earlier this year, Timet
said it would pay Haynes International Inc. an upfront fee of $50
million in exchange for Haynes' long-term commitment to provide
capacity to process up to 10 million pounds of flat products per year
on its 4-high Steckel rolling mill in Kokomo, Ind.
Reply
Brochstein is wrong again and again and again...
American Eagle August traffic up 2.9%
AirTran Airways August traffic up 34.6%
Southwest Airlines Co. August traffic rose 12.1%
United Airlines said traffic in August rose 2.3%
All airlines have reported higher traffic in August.
Paraphrasing Brochstein’s comments about TIE investors, Brochstein here looks like he has a titanium fork stuck in him...
The demand for steel metal was high in 1892 and it is still high in 2007.
Would it be more appropriate to make an analogy between titanium metal demand in 2007 and steel metal demand in 1892, rather than blindly comparing titanium metal to cell-phone tantalum capacitors in 2000?
I see Titanium Metals Corp. in 2007 as Carnegie Steel Company in 1892…
100 Fastest-growing companies
Corporate America's supercharged performers
And the winners are...
Even in a turbulent market, some companies are still enjoying exhilarating growth spurts. A stunning 37 of this year's fast-growers come from the energy sector, while some seemingly fleeting trends - like energy drinks - proved to have surprising staying power. (more)
1. NutriSystem
2. Hansen Natural
3. Arena Resources
4. Intuitive Surgical
5. Titanium Metals
6. Apple
...
money.cnn.com/magazine...
I have bad news for you.
Boeing Raises 20-Year Forecast for China Plane Demand
Sept. 18 (Bloomberg) -- Boeing Co., the biggest supplier of airplanes to China, raised its 20-year market forecast for the country by 21 percent as Chinese air travel expands at the fastest pace worldwide.
www.bloomberg.com/apps...
Titanium Supply Will be Tight Through 2010
Capacity expansions won't help supply until next decade
By Tom Stundza
Purchasing
September 26, 2007
Buyers are correct in worrying about supply of titanium and titanium
alloys through 2010. That's the admission from Dawne Hickton, vice
president and CEO of titanium producer RTI International Metals in
Niles, Ohio, even though producers are dusting off expansion
blueprints for titanium sponge and mill product capacity.
Buyers will have to blend long-term acquisition plans with risk
management programs because "supply still will be the issue for some
time to some," she says, since major jetliner makers already have a
six-year backlog for new aircraft designs that call for three to four
times as much titanium as older models.
Various buyer surveys by Purchasing have found concern about future
availability of titanium-from sponge, the raw material, to final
fabricated parts, which already take as long as 18 months for delivery
these days. "Mill product tightness will continue through 2010,"
Hickton tells the Basic Industries Group's Aerospace Materials Cost
Outlook and Forecast 2007 meeting in Philadelphia this week. "Final
finished product tightness will continue as well."
Reason: One key factor is the time it takes to get new capacity on
line. Hickton says 30-36 months are needed before a new sponge plant
goes in operation and even longer for downstream capacity of mill
products and finished fabricated parts-since production has to be
certified to meet aerospace and medical industry quality requirements.
John Mothersole, an economist with Global Insight in Eddystone, Pa.,
tells the conference that global sponge capacity will increase by 14%
annually between 2006 and 2010 to 220,000 metric tons-based on
expansions announced by RTI, Allegheny Technologies of Pittsburgh,
Russian producer VSMPO-AVISMA, Kobe Steel of Japan and several Chinese
firms. However, some of the Chinese expansions now are in doubt-yet
world demand will surge by as much as 40% in the same timeframe,
keeping pressure on supply and prices.
And there's also a chance that aerospace demand for high-grade
titanium and titanium alloy mill products could grow by as much as 22%
annually next decade- if and when the Boeing 787 and Airbus A350 and
A380 programs really take off. These future-model planes will switch
from traditional aluminum-lithium skins to composite materials to
reduce weight and cut maintenance costs. These planes will require 20%
of their weight to be titanium, as compared with 5% in previous
generations. That means that the Boeing 787 Dreamliner will have
250,000 lb of titanium per plane while the A380 will have 200,000.
© 2007, Reed Business Information, a division of Reed Elsevier Inc.
All Rights Reserved.
www.purchasing.com/art...
What happened? Well, first of all, stocks in general have declined, with the S&P 500 down about 10% since the article was published. XLB, the ETF for the Materials Sector, is actually up marginally. Specific to TIE, though, the inventory problem that I had suspected proved to be true, and the margins did prove to be unsustainably high. The earnings estimates for TIE have plunged. Part of the problem clearly has been the continued delays at Boeing.
Despite a high short-interest, large insider purchases, a share repurchase plan authorization, the implementation of a dividend and the addition to the S&P 500, the stock has plunged. While I think that the stock could fall to $12 (2X tangible book value), I tend to think that it is more likely to recover some of its losses over the coming months.
Good analysis, and nice call. Interesting to go back and read some of the comments in light of the last few months. Maybe a few people learned something?
What are your thoughts on TIE at this point, looking forward?
Good thing I sold last year, at a profit (!) in part from doubts raised in this piece.
Thanks, Mr. Brochstein!