Specialty metals producer Allegheny Technologies' (NYSE: ATI) 2010 second quarter net income was $36 million or 36 cents a share, up from a loss in the year-over-year quarter. Sales grew by 48% to over $1 billion, and the operating income was up 118% and represented nearly 12% of sales. Despite the significant improvement, Allegheny still has a lot of work to do to justify the current valuation. While the 2010 figures compare very favorably with 2009, virtually all industrial companies had depressed earnings in 2009.
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A Wild Ride
Allegheny supplies a diversified consumer base with a diversified catalog of metal commodities. The company's major markets are aerospace and defense, the oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, machine and cutting tools, and construction and mining. Its products include titanium and titanium alloys, nickel-based alloys and superalloys, grain-oriented electrical steel, stainless and specialty steels, zirconium, hafnium, niobium, tungsten materials and forgings. Needless to say, when the economy blew up in 2008 and commodity prices tanked, Allegheny shares fell over a cliff in much the same way that its peers did.
As the economy was rescued and the end of world was prevented, Allegheny businesses experienced some improvement, and the rising tide took the shares higher. Today they sit at a price level and valuation that typically has not rewarded investors over the long run.
Work To Be Done
Because Allegheny has returned to profitability, the current P/E ratio is a meaningless 104. While the company has a forward P/E multiple of 15, I would take this with a grain of salt at this moment. Diversified commodity company Teck Resources (NYSE: TCK), a much more profitable business than Allegheny, currently sports a forward multiple of 8 times earnings. Because of leverage, Teck shares were crushed when the financial markets collapsed, but superb management steered the company to an impressive turnaround. (Learn more about turnarounds; see Turnaround Stocks: U-Turn To High Returns.)
Teck currently sports profit margins in the double digits, while in the recent quarter, Allegheny was just under 4 percent.
Yet Allegheny is aggressively working to improve its operations. The company recently announced organizational changes, naming a new vice president and a couple of other senior executive level changes. Nevertheless, the market appears to have fully valued the company at this juncture. Allegheny is not alone. Titanium Metals (NYSE: TIE), despite a debt-free balance sheet, is changing hands at 33 times forward earnings. On the other hand, you have businesses like Teck and smaller commodity players like zinc producer Horsehead Holdings (Nasdaq: ZINC) trading at more digestible valuations.
Wait For Opportunity
Despite the company's shares being crushed due to temporary economic or market conditions, Allegheny has created tremendous wealth. Unfortunately, today's share price is a lot higher and offers no compelling value in today's world.
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