Why I'm Not Buying Allegheny Technologies, Titanium Metals, or RTI International Metals, Just Yet

One area of the market that has seen a lot of pop in recent years is speciality metals. One sub-sector in particular has caught my eye - titanium. However, I am not the first to catch this trend, and stocks in this sector have seen enormous runs the past few years. But with their specialization in aerospace, chemical, oil related areas, they should continue their long-term out-performance. But, are they buys right now? Based on their technical charts, I'd argue no. Let me explain why below.

The three stocks that investors are latching onto as titanium plays (in order of size) are: Allegheny Technologies (ATI), Titanium Metals (TIE), RTI International Metals (RTI).

Fundamentally all look pretty sound:

Allegheny Technologies trades around $95, with earnings estimates of $7.97 for 2007, and $8.74 in 2008, generating forward P/E ratios of 11.9 and 10.8. However earnings estimate growth for next year is only 9.7%, with longer term growth estimates of 14%+. ATI has revenue of about $6 billion a year.

Titanium Metals trades around $30.25, with earnings estimates of $1.61 for 2007, and $2.03 in 2008, generating forward P/E ratios of 18.8 and 14.9. Its earnings estimate growth for next year is 26%, with longer term growth estimates of 25%. TIE has revenue of about $1.5 billion a year.

RTI International Metals trades around $66.50, with earnings estimates of $4.09 for 2007, and $5.26 for 2008, generating forward P/E ratios of 16.3 and 12.7. Its earnings estimate growth for next year is 29%, with longer term growth estimates of 22%. RTI has revenue of about $600 million a year.

This is pretty impressive on first glance. However, the stocks have been quite weak of late, with RTI International Metals leading the downturn, with a severe downturn from them $100 level in late April to the mid $60s now, following a series of bad news events, the most recent of which was a downward revision of full year profit in late July due to an investigation by U.S. Customs (which could potentially impact earnings if an adverse decision is made), along with a reduction in selling price into the Joint Strike Fighter program with Lockheed Martin (LMT).

So while I mentioned the $4.09/$5.26 estimates for 2007/2008, these are actually materially lower than the $4.40/$5.75 estimates for the same time frames that analysts had for the stock 3 months ago. While Allegheny Technologies and Titanium Metals have not seen any revisions of the type, their stocks have followed RTI downward over the ensuing months.

Here is a case where one can like the fundamental picture in the long run, but the charts (even for the most basic of technical analysis), are saying it's not time to get in yet. RTI has lost about a third of its value in the past four months. Looking at the chart, it broke below its 50 day moving average in early May, then broke below its even more important 200 day moving average (at the time just north of $75) in late July, and in mid-August its chart formed the death cross, a bearish indicator where a short term moving average drops below a long term (in this case the 50 day moving average dropped below the 200 day). The stock has shown very little signs of life of late, not even bothering to retest a move back to the 50 day moving average, and stalling out intraday at $74 level on its best days. Until the profit picture becomes a bit clearer (i.e. stable), and the chart improves, this stock is best left alone.

The stock is right around lows of the year, and the next truly solid base is the $40 level, which the stock hung around in July - October 2006. Could the stock get that low? I don't know, but I don't want to be bottom picking to find out. So, a buy for this name would be better served either near that $40 level or a reversal in the chart, and a strong price move back above the 50 and 200 day moving averages - 50 day is currently approximately $74, and 200 day is at approximately $78.50. Nothing at this time technically indicates a reversal of this time was in the offering and in fact and moves upward would probably be best served to short the stock (although I cannot short individual names in this fund)

Titanium Metals has a similar chart pattern, although it is not quite as severe as RTI. After breaking down below its 50 day moving average in late May the stock has slithered around that level with intermediate breaks down below the 200 day moving average (but recovering), for most of June and July. However in early August, after the stock closed below the 200 day moving average, the stock has never truly recovered, and has been stuck below this important level for the past month. Much like RTI, a death cross appeared in late August, signaling a bearish chart. Again, much like RTI, a trader would be shorting this stock on any moves up to the 200 day moving average. Looking at a longer term chart, there seems to be a low of support in the $28 level, so the price seems a bit boxed in here now. A break of $28 would bode quite ill for the stock near term.

Lastly, Allegheny Technologies (ATI) which is the only name of the 3 that I hold in the fund. However, pending a better chart, I am down to a tiny holding position of 0.2% of the fund. When I started the fund in early August, this was the only name of the 3 whose stock price was still holding above the 200 day moving average, so it's relative strength compared to the two others was the best in the group. However in the weakness of mid August the stock dropped below its 200 day moving average nad has not really recovered - it did close above the 200 day moving average briefly for 2 sessions but quickly retreated. The chart has not yet gone to death cross status, but the 200 day moving average is $100 and the 50 day is $102, so its not far away. Some decent support for this name could be found down at $85; however with the technical set up on the chart, it is hard to be bullish on the name until it breaks above both its major moving averages on some solid volume. Again, until proven otherwise, this stock is a short at it retraces back up to its moving averages, until the pattern changes.

So why talk about 3 stocks I am not buying in the fund? Well here is a textbook case of stocks I like from a fundamental basis, or at least a group I like from a fundamental basis - but the charts are saying don't buy at this time. My favoritism towards Allegheny Technologies, aside from its superior chart in August was its direct tie to the Boeing (BA) Dreamliner launch. However, the test flights for the Dreamliner have been pushed back (twice now), and this might be having some damage to the near term prospects to ATI. With that said, these companies interest me in the longer term, but right now they make up very little of the portfolio. Here is a case where knowing just the most basic of technical analysis (selling stocks as they break major support areas) could save you a lot of portfolio grief.

Again, there are two ways to play these type of names: 1) try to bottom fish them (but picking the correct spot is always difficult), or 2) wait for the momentum to return to their names, as they reverse and break back above key resistance levels. As individual investors, we will never have as much info as the 'big boys,' or the 'market as a whole,' so watching the price can usually tell us when there is some material fundamental weakness potentially ahead. So right now this group is on hold for addition to the fund until better price action emerges in the names.

Disclosure: The author is long Allegheny Technologies in the fund, but has no personal positions.

ATI vs. RTI vs. TIE 1-yr chart:

Comments

[Jessica]

"The three stocks that investors are latching onto as titanium plays"

Actually, there are only two titanium plays. ATI is a stainless steel and specialty metals company (heavily dependant on stainless steel markets - 80%), only 20% of its revenue comes from titanium metal.
ATI is more a stainless steel (80% of revenue) play than titanium play (20% of revenue).

Out of the two (TIE and RTI), TIE is a winner.

[TraderMark]

Hi Jessica, I agree that ATI is less of a pure play on titanium than the other 2, with a broader portfolio. However of the 3, I like it best due to its direct tie to Dreamliner. An investors *have* latched on to it for the titanium portion hype in 06. It also was the last to fall of the 3 in terms of stock price on this recent drag - first came RTI, than TIE, than finally ATI succumbed to the general weakness in this 'area'.

[Jessica]

Titanium Metals Corp. is on the cover of FORTUNE magazine latest issue.

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...

[Vincent L.]

"My favoritism towards Allegheny Technologies, aside from its superior chart in August was its direct tie to the Boeing (BA)"


Not only ATI has LTA with the Boeing.
Titanium Metals Corp: "We have LTAs with certain major customers, including, among others, The Boeing Company (“Boeing”), Rolls-Royce plc and its German and U.S. affiliates (“Rolls-Royce”), United Technologies Corporation (“UTC,” Pratt & Whitney and related companies), Société Nationale d´Etude et de Construction de Moteurs d´Aviation (“Snecma”), Wyman-Gordon Company (“Wyman-Gordon,” a unit of Precision Castparts Corporation (“PCC”)) and VALTIMET SAS (“VALTIMET”)."
www.timet.com/pdfs/06a...


I agree with Jessica, ATI is a steel and specialty metals company rather than a titanium company. You need to compare apples to apples (not oranges to apples), should compare ATI to X or CRS (same sector), rather than to companies from another sector (TIE and RTI)

80% of ATI business is not titanium.
Nickel-based Alloys
Cobalt-based Alloys
Stainless Steel
Zirconium Alloys
Hafnium Alloys
Niobium Alloys
Tantalum Alloys
Tungsten Materials

20% of ATI business is titanium

[Vincent L.]

"Lastly, Allegheny Technologies (ATI) which is the only name of the 3 that I hold in the fund. However, pending a better chart, I am down to a tiny holding position of 0.2% of the fund. When I started the fund in early August, this was the only name of the 3 whose stock price was still holding above the 200 day moving average, so it's relative strength compared to the two others was the best in the group"

The reason ATI was holding above the 200-day moving average was secondary to constant weekly hype by Cramer, not because of ATI fundamentals.

[echotoall]

i don't know Trader Mark, I am a trader (and am playing TIE) and can not get excited again until it breaks 32 or so, but when I see multi-million dollar insider purchases while TIE is 'broken' by insiders... it makes me pay attention. Maybe the market is having one of its 'inefficiency' moments. Hence deducing future fundamental performance via current stock price is wrong. just a thought.

[Vincent L.]

"However, the test flights for the Dreamliner have been pushed back (twice now), and this might be having some damage to the near term prospects to ATI."

From American Metal Market (9/7/2007)

News last week that the first test flight of the Boeing 787 Dreamliner has been postponed from September to November-December raised the possibility to some outsiders that it might signal a possible stretch-out in supplier deliveries.

But Boeing Co. says it isn't putting on the brakes. The test flight postponement has been one of the few delays for an aircraft whose production so far has been relatively glitch-free in terms of program schedules, especially for its huge scope. Not only is the 787 important to the aerospace industry around the world, it's particularly critical for titanium producers, for whom the aircraft is the largest in history in terms of potential business. The 787 contains an estimated buy weight of a record 225,000 to 250,000 pounds of titanium, and with 684 firm orders as of last week the plane may be getting the largest liftoff, in market terms, in the history of commercial transports. Delays in the Airbus A380 program--itself a large user of titanium but probably still far less than the 787 over the life of both programs--resulted in a discernable buildup of titanium inventories and probably contributed in part to an eventual reduction in mill lead times as well as to a softening in spot prices. But Boeing Commercial Airplanes, Seattle, said in response to an AMM query that the first flight's postponement "won't impact manufacturer delivery schedules." The Boeing unit pointed out that the flight "involves airplane No. 1, and we continue to produce the follow-on airplanes."

[TraderMark]

Vincent, I did read that as well. Sometimes investor psychology gets in the way of logic. That is what makes the market tough sometimes. When I read that data, I see no reason for the weakness especially in TIE or ATI, yet the stocks remain weak. Hence you have to respect what the 'market' is telling us, until the 'market' changes its mind. Again, my call is a near term, and I am bullish on the sector, just not the stocks at these levels and with these weak charts. I try to stay focused on very good sectors with long term strength, of which I'd consider these speciality metal makers to be one, but until the price action improves the stock appreciation is limited. This will change at some point in the future, at which point I plan to add a good lot of shares. Thanks for your comments.

[TraderMark]

echotoall - my thoughts exactly on the 32 or so area. TIE's CEO has long history of insider purchases - always good, but until chart takes a turn for the better we are limited to the upside. Right now a break of the 200 day (32.50) is in order to get constructive for a longer term trade. Until then, range bound and 'dead money'; one could buy now and hold for a while but when a change in stock direction happens is unknowable. In the meantime you can do more things with your money if you have a shorter time frame; time value of money sitting in dead stocks is not something I enjoy. That said, for trading purposes in that narrow range the past 6 weeks, 28-32 its been a nice area to play.

[Vincent L.]

Titanium Metals Continues To Be Primary Supplier For UTC's Aircraft

The deal includes United Technologies' Pratt & Whitney, Pratt and Whitney Canada, Sikorsky Aircraft Corp. and Hamilton Sundstrand operating units.

The agreement, effective as of Jan. 1, 2007, provides for Titanium Metal's supply of titanium products to United Technologies Corp. for commercial and military aircraft and aircraft engines.

[BG]

A380 Rolls-Royce Trent 900 Use 11 Tons of Titanium

The engines alone (Rolls-Royce Trent 900) of the Airbus A380 use about 11 tons of titanium.

www.rolls-royce.com/ci...

en.wikipedia.org/wiki/...


The engines alone (Rolls-Royce Trent 1000) of the Boeing 787 use about 6 tons of titanium.

www.rolls-royce.com/ci...



TIE agreement with Rolls Royce to supply titanium for:

Trent 900(R) for A380
Trent 1000(R) for B787
Trent 1000(R) for 350XWB


Titanium Metals Corporation ("TIMET") (NYSE: TIE) announced today that it has entered into a new, long-term titanium supply agreement with Rolls Royce plc and certain of its affiliates ("Rolls-Royce&quo... The agreement, effective as of January 1, 2007, provides for TIMET's supply of titanium products to Rolls-Royce for gas turbine engine production through 2016. Total revenues over the term of the contract are estimated to be in excess of $2 billion. TIMET will continue to be the primary supplier of Rolls-Royce's titanium requirements for its gas turbine engines.

Steven L. Watson, CEO and Vice Chairman of the Board of Directors of TIMET, noted, "This new agreement extends our longstanding strategic relationship with Rolls-Royce to each company's world-wide affiliates, reflecting the global nature of our companies' operations. We believe this new agreement also further solidifies TIMET's industry-leading position on hollow fan blade titanium components for aircraft engines and provides opportunities to grow with Rolls-Royce in the development of engine programs for the latest generation of twin-aisle aircraft such as the Trent 900(R) for the Airbus A380 and the Trent 1000(R) for Boeing's 787 Dreamliner and offers potential growth in future programs such as the Airbus 350XWB."

www.timet.com/fi_cc/Pr...

[BG]

"Introducing the Trend 1000" Video

www.rolls-royce.com/ci...

[Vincent L.]

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...

[Vincent L.]

TIE Raw Materials 2006 - from TIE 2006 Annual Report (before 4,000 VDP
metric tons addition that will be operational in 3Q07, source)

Internally produced sponge.....24%
Purchased sponge.....29%
Titanium scrap.....40%
Alloys.....7%

Latest (Sep07) Finished Titanium (Aerospace Grade-5 [6-4 titanium])
Product Prices and Raw Materials (per pound)

6-4 Plate.....$39/lb (number one TIE product)
6-4 Bar.....$36/lb (number two TIE product )
6-4 Ingot.....$20-22/lb
6-4 Sponge.....$12/lb (grade-5 TIE produced titanium sponge, aerospace
and defense markets use primarily aerospace grade titanium products
made using this sponge)
6-4 Scrap.....$7.50/lb (raw material)

A-380 activity is expected to pick up over the next year, while
history's largest aircraft consumer of titanium, Boeing Co.'s 787
Dreamliner-the first of which is due to be delivered in May next year-
continues to move toward full production.

Moreover, judging by TIMET's continuing strong average realized prices
this year, titanium sold under long-term supply agreements, which
account for most of the material shipped by TIMET, has not shown the
kind of decline that's plagued the spot market and titanium scrap. On
the contrarily, lower titanium scrap and sponge prices this year (raw
material) help to increase TIE profits. (6-4 Titanium Scrap - $7.50
per pound, it was $9-10 in May)

TIE Sales by End Market 2007
Commercial Aerospace.....57%
Military/ Defense.....16%
Industrial/ Consumer Applications.....17%
Other (Ti Fabrications, Ti Scrap, Ti Tetrachloride).....10%

Vs.

RTI Sales by End Market 2007
Commercial Aerospace.....45%
Military/ Defense.....32%
Industrial/ Consumer Applications.....23%

Vs.

ATI Sales by End Market 2007
Aerospace/Defense........
Chemical Process/ Oil & Gas.....19%
Electrical Energy.....11%
Medical.....3%
Other.....37%

57% of Titanium Metals end market is commercial aerospace. Industry
estimates put the buy weight of titanium in the B-787 at 225,000 to
250,000 pounds and A380 involves some 150,000 to 200,000 pounds of
titanium (buy weight) per plane.

In addition, TIMET is the primary supplier of Rolls Royce's titanium
requirements for its gas turbine engines:

Trent 900(R) for A-380
Trent 1000(R) for B-787
Trent 1000(R) for A-350XWB

It is clear that TIE will benefit the most (vs. ATI and RTI) from the
coming explosive commercial aerospace demand (A-380, A-350XWB, and
B-787).

[TraderMark]

Great post Vincent - where did you pull the end market sales by % data?
That post was more of a technical short term call - waiting for a catalyst. Since that post I have initiated a position in TIE (once the chart looked positive technically) and added back to my ATI position as well. Still want to see some more earnings stability out of RTI before jumping on board there so TIE/ATI for now.

See here:
www.fundmymutualfund.c...

I think all 3 are in the right place/right time - ATI exposure to chemical process/oil & gas is another market I am playing in numerous ways and am long term for the very long run. I appreciate you writing all that out!

[Leo]

My thouths on TIE from technical point of view.

The reason for TIE's range bound movement is:

www.schaeffersresearch......

Put/Call ratio of 0.58 for September options is bearish. Sizable amount (>8K) of put contracts @ $30 strike price creates strong support, while 10.5K of call contracts @$35 strike price very strong resistance.

If TIE closes above $32 on INCREASED volume, it will indicate a change of trend by breaking the neck of the inverted head & shoulders as well as a resistance line drawn from high on 05/11/07 and high on 7/23/07.

[Vincent L.]

Delays.... Delays.... The Sky Is Falling... Or A Buying Opportunity

Delays..., delays..., the sky is falling..., hysterically screamed Chicken
Little and sold his TIMET shares to Foxy Loxy, after the Boeing
announced today that 787 Dreamliner delivery will be delayed by six
months.

Lets examine the facts and see if the sky is really falling...

1. Boeing Conference Call Transcript:

"(Robert Stallard - Banc of America Securities - Analyst)
- James, I'd just like to follow up on your comment about the supply
chain. To clarify, you're basically saying that you're telling your
suppliers to stick to the previously stated production schedule,
right?

(James Bell - Boeing Co. - CFO)
- That's correct."

Ok, Boeing will keep supply chain on its current production schedule,
meaning the suppliers will not be impacted by the delay, meaning it is
business as usual for TIMET.

2. "Boeing says the problems with the 787 are different from those
with the A380 because they don't point to a fundamental flaw in its
design, but rather involve difficulties in the supply chain."

Contrarily to the Airbus delays (by 2 yrs), the Boeing delivery delays
will not negatively affect titanium demand. The Boeing will continue
building the airplanes. They plan to have 40 airplanes ready by the
end of 2008, meaning TIMET will continue shipping titanium products to
the Boeing according to the previous production schedule - nothing has
changed.

3. "Boeing officials said they expect to have about 40 Dreamliners
completed and on the ramp when the Federal Aviation Administration
declares the airplane ready for delivery in 2008."

In other words, instead of delivering five airplanes each month (May
to December 2008; 5 x 8 = 40 airplanes); the Boeing will deliver 40
airplanes in December of 2008. In addition, they plan to deliver 109
airplanes in 2009 (only three airplanes short of the original
schedule). You can see that this is mostly the delivery delay and not
the production delay (as it was with Airbus). Again, there is NO
impact on TIMET.

online.wsj.com/article...

The evidence shows that the irrational panic and fear driven selling
by Chicken Little was a buying opportunity for Foxy Loxy.

[TraderMark]

Actually I agree with you in theory. The problem is you use logic and as you have seen I am sure, the market doesn't use logic in the near term very often. See the rise of no name Chinese stocks rising 300% in a week, or big cap tech stocks going up daily for 7 weeks straight.

I just put a new article out on TIE/ATI/RTP. I think the Boeing news will affect psychology and not business. So for the long and medium run, nothing changes. In the short run, you have psychology which does change so ... as you say (and I wrote)... you can find opportunities if the stocks pull back from this sort of news. THese are all long term contracts with no changes to them - hence an opportunity. But I will see how the market treats them near term and let the charts dictate the short term movement.

[Vincent L.]

Bank of America Securities called the delay a "non-event" for titanium producers, noting that the 787's full production schedule remains "intact though 2011," and significant growth in titanium volume continues to be expected for 2008.

P.S. The charts will not tell you that TIE stock is 30% undervalued (PEG=0.68), under-owned, and largely undiscovered by the Wall Street. In addition, the charts will not tell you that the Wall Street’s darling ATI is overhyped, overrated and over-owned secondary to its unjustified Brad Pitt like status. (Courtesy of constant Jim Cramer hype). Moreover, the charts will not tell you that TIE is a takeover target…

[Vincent L.]

Addendum: ATI is overvalued for a steel company (only 20% of ATI business is titanium).

[Vincent L.]

Everyone has missed it last week, during Alcoa CC Q&A; Kuni (Bank of America analyst) asked Belda if AA would consider diversifying into other metals (making an acquisition). Belda said that they look forward to it (if the price is right).

Kuni: “Do you think at some point you will consider more diversified metals portfolio approach?”

Belda: “Over the years, we have looked at diversified portfolio that includes metals like titanium, a product with similar markets that we operate in. We haven’t found anything (a titanium company) that would add market value to the shareholders; therefore, we didn’t do anything (we didn’t do any acquisitions) at those times. But it doesn’t mean we do not look forward to it…”

Kuni: “Ok, thanks a lot”

The answer suggests that Alcoa was shopping for a titanium company but Belda did not want to pay a premium for it. I bet that Simmons did not want to sell TIE cheap and Belda was a stingy Scrooge. I am sure that Belda will reconsider Simmons' price in the near future, because Alcoa needs diversification to boost its poor growth, and Belda wants to keep his job.

[Vincent L.]

"undiscovered&quo... is no longer true, but it is still at least 30% undervalued (PEG=0.68) and under-owned...

Titanium Metals Corp. (NYSE:TIE) will replace Bausch & Lomb Inc. (NYSE:BOL) in the S&P 500...
www2.standardandpoors....

[TraderMark]

Hi Vicent, I saw that news this morning, congrats, its technically back above the 50 day moving average. If it can hold that level it will bode well. I'm glad to see it get its recognition. Hopefully it will decouple from ATI whose miss was stainless not titanium