Titanium Metals: 3Q Earnings Miss Offers Good Entry Point

Titanium Metals Corp. (TIE) [TIMET] is a company that manufactures and distributes titanium. We believe the company will continue to benefit from the upturn in the commercial aerospace cycle, as titanium is a key material on airplanes. There is high need for new aircrafts, while the production from Boeing (BA) and Airbus remains constrained. The current strength in aerospace demand continues to be driven by international airlines in developing economies. Nevertheless, the legacy U.S. airlines are expected to return to the market over the next several years. It is widely expected that the commercial aerospace cycle will last until 2010 or 2011.

Titanium Metals has already had a nice run over the past two years but we believe there is much more upside going into 2008 with all of the new titanium capacity coming on-line for the company. TIMET will enjoy an increase in profits with these additions in capacity, which will drive the stock to new highs. There have also been rumors of late that TIMET may be a potential take-out candidate, as larger metals companies look to expand and diversify and cash-rich private equity funds look for investments. The current level offers a good entry point for long term investors as the shares recently sold off due to a 3Q earnings miss related to heavy metals inventory in the aerospace supply chain. We view the earnings miss as an anamoly as the supply chain should self-correct over time.

Disclosure: none

Comments

[Crush Da Bears:]

The long-term outlook for TIE is still very positive. The insiders see this as a buying opportunity and continue accumulating.

www.form4oracle.com/co...


TIE third quarters (3Qs) have been historically weak, secondary to TIE European facilities close in August and equipment maintenance.
The sale volumes always rebound and catch up during the fourth quarter (4Q). (Rebounded in 2006, 2005, 2004, 2003 ...)

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TIE Outlook - Form 10-Q (Filed: November 07, 2007)

We achieved record levels of net sales and operating income in the first nine months of 2007, reflecting strong demand for titanium metal across all major industry sectors (commercial aerospace, industrial, military and emerging markets). These strong operating results were largely driven by higher selling prices for both melted and mill products, as well as favorable changes in product mix. Our backlog remained steady at $1.0 billion as of September 30, 2007, June 30, 2007 and September 30, 2006.

We expect current industry-wide demand trends to continue for the foreseeable future, and we do not anticipate the outlook being significantly impacted by the recently announced delay of the initial deliveries of the Boeing 787 commercial aircraft. As described below, based on these trends, we are expanding our productive capacity, and we expect our overall capacity utilization to remain high for the remainder of 2007. We intend to continue exploring other opportunities to expand our existing production and conversion capacities through internal expansion and long-term third-party arrangements, as well as potential joint ventures and acquisitions. These efforts focus on opportunities to enhance the certainty, quality and reliability of product supply in order to service the expanding needs of our current and prospective customers. These efforts have included strategic initiatives to assure that we have the necessary availability of raw materials, melt capacity and mill product processing capabilities. With our current plant production levels near practical capacity, we have taken several actions to significantly expand our productive capacity across all areas of our manufacturing operations, including the following:

Raw materials. We completed the expansion of our existing premium-grade titanium sponge facility in Henderson and continue to ramp up commercial production. This expansion provides annual productive sponge capacity of approximately 12,600 metric tons, which is an increase of approximately 47% over the previous productive sponge capacity levels.

Additionally, we expect the design and engineering efforts for a new premium-grade titanium sponge facility to be substantially completed by year-end. The facility has been designed to be built at a location that would provide the flexibility for direct production or third party supply of titanium tetrachloride, a chemical manufactured by titanium dioxide pigment (“TiO 2 ”) production facilities that is an intermediate feedstock material for the manufacture of both TiO 2 and titanium sponge. We believe such a facility could be operational within approximately two years of the commencement of construction.

In addition to our continuing efforts to complete plans for a new sponge facility, we have also continued to explore and pursue additional third-party long-term sources of sponge and titanium scrap that could provide us with lower cost and more flexible sources of raw materials.

As a result of these efforts, we have recently entered into two new long-term sponge supply agreements, both commencing in 2008 and expiring initially in 2012 and 2015, respectively, each with renewal options to extend through 2020. These new agreements, together with long-term supply agreements currently in place, provide for the supply of varying annual amounts of up to 10,500 metric tons of titanium sponge. In addition, we continue to explore other opportunities to secure long-term titanium sponge supply agreements and utilize sponge acquired from established suppliers. We also utilize titanium scrap for melted products that is internally generated at our production facilities, purchased from certain customers under contractual agreements or acquired in the open metals market. In anticipation of a significant increase in the availability of titanium scrap and moderation in its cost relative to levels experienced during the past 18 months, we are increasing our capacity to recycle scrap and use EB melt capacity to efficiently use a combination of sponge and scrap to produce melted titanium products.
Our goal is to have assured and flexible availability of raw materials which affords us the ability to respond to industry demands in a timely and cost-efficient manner. We believe our projected mix of internally generated sponge and scrap, along with our assured long-term third party sources of sponge and scrap, will assist in controlling cost for the products we produce compared to what could be achieved solely through additional internal production of sponge.


Melted products. We are in the process of expanding our global melt capacity. We currently expect to complete an 8,500 metric ton expansion of our electron beam (“EB”) cold hearth melt capacity in Morgantown by early 2008. In addition, we have commenced efforts to add another EB furnace at the same facility, which is currently on schedule to be completed in the last half of 2009. During 2007 we also commenced construction of vacuum arc remelting (“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 also been able to leverage our melt capacity and expertise as integral components of certain arrangements for additional and alternative sources of raw materials and conversion services.
Mill products and conversion services. We have numerous capital projects in process to improve and expand our production capacity for mill products. Also, under various conversion services agreements with third-party vendors, we have access to a dedicated annual capacity at certain of our vendors’ facilities. Our access to outside conversion services includes dedicated annual rolling capacity of at least 4,500 metric tons until 2026, with the option to increase the output capacity to 9,000 metric tons. Additionally, we have access to dedicated annual forging capacity of 3,200 metric tons beginning in 2008 and ramping up to 10,400 metric tons for 2011 through at least 2019. These agreements provide us with a long-term secure source for processing round and flat products, resulting in a significant increase in our existing mill product conversion capabilities, which allows us to assure our customers of our long-term ability to meet their needs.

We believe our efforts to prudently allocate available resources within our entire manufacturing process, supplemented with committed capacity from third party sources, will allow us to achieve profitable growth and enhanced long-term return on invested capital.

2007 Nov 10 06:03 PM

[Kunst:]

June 25, 2008: TIE closed today at $13.94.

2008 Jun 25 04:56 PM