Specialty metal maker Allegheny Technologies Incorporated (ATI) is slated to release its third quarter 2010 results on October 26, 2010. Allegheny has projected third quarter 2010 net income of 26 cent (before extraordinary charges). Adjusting for special items, the company expects to earn 1 cent per share.
The forecasted earnings per share is substantially below the Zacks Consensus Estimate of 30 cents. For the year, the consensus estimate is pegged at $1.40 per share.
Allegheny expects certain one-time charges in the third quarter due to an unforeseen rise in the cost of nickel. The company expects to report an additional pretax first-in-first-out inventory charge of about $33 million, or 21 cents per share. Allegheny also expects a tax charge of 4 cents per share due to the Small Business Jobs and Credit Act law that was put into application on September 27, 2010. The law permits to immediately write off half of the cost of depreciable assets placed into service during 2010.
Although the tax law change will have a negative impact on the company’s earnings for the near-term, Allegheny expects a favorable impact in 2011. Allegheny expects demand in the global key markets, particularly aerospace and defense, oil and gas or chemical process industry, electrical energy and medical to improve. However, the volume gains are likely to be offset by the volatility in the London Metal Exchange nickel market that will have a negative impact on Allegheny’s standard stainless products business.
Second Quarter Highlights
Allegheny Technologies Inc. earned $36.4 million or 36 cents per share, slightly below the Zacks Consensus Estimate of 37 cents, though significantly higher than last year’s $3.6 million or 3 cents per share. Quarterly revenues soared 48% year over year to $1.05 billion from $710 million in the year-ago quarter on higher shipments and rising average selling prices. Sales grew 17%, sequentially. Yet revenues fell short of the Zacks Consensus Estimate of $966 million.
Allegheny saw higher demand from global end markets, especially the aerospace and defense markets. Demand from oil and gas/chemical process industry, electrical energy and medical markets remained moderate. Sales in these markets constituted about 70% of Allegheny’s total revenue. Segment wise, revenue increases were distinct in Flat-Rolled Products segment (84%) and in the Engineered Products segment (75%), while sales in the Higher Performance Material segment increased modestly (7%).
For further details please read: Allegheny Misses by a Penny – Zacks.com
Zacks Consensus Estimates and Recommendation
Currently Allegheny is a short-term (1 to 3 months) Zacks #4 Rank (Sell) but a long-term (6+ months) Neutral recommendation.
Analysts and investors have remained negative on Allegheny in the short-term. The bearish sentiments are based on the company’s latest weak third quarter earnings guidance. After reporting a lower-than-expected second quarter of 2010, Allegheny is set to miss consensus estimates again in the third quarter 2010.
Notably, there is a 4 cents fall in the Zacks Consensus Estimate for the upcoming quarter over the last 7 days. Over the last quarter, the consensus estimate has declined 17 cents.
Allegheny is facing an overcapacity of stainless steel. A significant portion of the sales is made to customers in the commercial aerospace industry that has historically been cyclical. Although the aerospace market has shown some improvement recently, we expect Allegheny to see a slower growth in its High Performance Segment, which generates a major chunk of revenues. Based on these factors, analysts have a negative outlook on the stock and have pulled down their earnings estimates.
Allegheny has posted positive average earnings surprise of 3.75%, albeit missing consensus estimates in two of the trailing four quarters. Allegheny is focused on reducing its cost structure and has set a cost savings target of about $100 million in 2010. The company also expects end markets to improve and has a positive outlook for 2011, which injects some optimism. For now, we remain on the sidelines and maintain our Neutral recommendation on the stock in the long-term.
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