[ad_1]
Alan Lagadoux
Will a true commercial aerospace market take off?
Air travel continues to recover and airlines continue to upgrade and expand their fleets, but the progress of the commercial aerospace recovery in 2022 is more volatile than expected.order Lead times for key materials and components continue to grow, but unreliable supply chains and component availability are leading to slower ramps than originally anticipated.
this is not particularly good news ATI (New York Stock Exchange: ATI) (previously known as Allegheny Technologies) is not in the near term, but multi-year opportunities to grow backlog, improve margins and capitalize on strong commercial aerospace demand for cash flow has good news.
ATI’s stock is up about 7% since my last update, enough to beat the market, as well as most other material and component suppliers. carpenter (CRS), Howmet (HWM), hexel (HXL), and Universal Stainless & Alloy (USAP). Valuations are still relatively attractive and I think these stocks are still on the upside.
Key trend in Q3 is positive, but some challenges dampen guidance
In a mixed quarter for aerospace suppliers, I’d call ATI’s third quarter “good enough,” but Street was clearly shaken by weaker guidance for next quarter ( More on this later). Importantly, orders continue to come in, and the core profitability of the business looks attractive as these orders grow into revenue over time.
Revenue of $1.03 billion was up 42% year-over-year and 8% quarter-on-quarter, approximately 10% ahead of expectations due to strong demand from aerospace customers. The Advanced Alloy & Solutions (or AAS) segment grew 35% year-on-year and 2% quarter-on-quarter, despite continued disruption to its Asian business due to China’s zero COVID policy. Orders for jet engine materials and parts were strong, increasing 16% year-on-year.
Gross margin increased 640bp year-over-year to 17.8%, down 50bp as ATI addressed some maintenance outage issues, despite the 70bp margin increase seen in the second quarter I didn’t reach it. EBITDA was up 77% year-over-year and down 1% sequentially, while segment-level EBITDA was up 72% year-over-year and down 2% on margins of 15.7% (12.9% year-over-year, down 1% quarter-on-quarter). 17.2%).
By segment, AAS posted adjusted EBITDA growth of 34% year-on-year (and a 28% sequential contraction) and profit margin of 13.2%, while HPMC grew 129% and 42% year-over-year (margin 18.8% and an incremental profit margin of approximately 30%).
Guidance for the fourth quarter was less robust, with management lowering its EPS guidance by about 4% at the midpoint compared to sell-side estimates in the report. Management expects continued pressure from China’s zero COVID policy and the impact of prolonged maintenance shutdowns. The company has also decided to cut some production to reduce excess inventory it built up earlier in the year in response to Russia’s invasion of Ukraine.
Commercial aerospace is recovering, but the path is more volatile than expected
Commercial aerospace activity is steadily recovering, but the recovery is more volatile and unpredictable than originally anticipated.At the most basic level, both airbus (OTCPK:EADSY) or Boeing (BA) is accelerating production at a pace analysts (and many suppliers) expected earlier this year, and Boeing’s latest guidance on 737 production was still fairly vague. It looks like it will be an event in the second half of 2023.
However, this will not adversely affect ATI’s business. ATI reported 122% year-over-year and 25% quarter-over-quarter growth from commercial aerospace customers in the quarter, with engine-related revenues up 143% and 26% year-over-year. Boeing has said engine availability for the 737 is not an issue at this time, but other suppliers are reporting longer lead times for engine parts, and ATI management said lead times for titanium products have increased. , Airbus and Boeing production increases constrained by inconsistent performance among suppliers, while inventories normalize and companies overcome component and labor challenges As time goes on, this should start to resolve in 2023.
Opportunity to take over previous business due to strong demand VSMPO-AVISMA (Russian titanium supplier and the world’s largest titanium manufacturer), ATI is investing in additional production capacity. In the short term, the new vacuum arc furnace should increase titanium melting capacity by 25%, but management wants to increase its electron beam melting capacity to drive his 60% increase overall from 2025 onwards. I am considering. Capabilities for aerospace customers and away from other end markets.
It’s also worth noting that the ramp seen in commercial aerospace production so far is heavily concentrated in narrow-body aircraft. ATI’s airframe components business is heavily leveraged by widebody, so when production starts to make more meaningful improvements in 2023 or 2024, we’ll be leveraging ATI’s capabilities even more.
Outlook
As commercial aerospace demand accelerates (which may be uneven), other markets look a little less robust. Energy sales fell 4% quarter-on-quarter. This is his second largest market after Aviation/Defense, at nearly 20%. I think the slowdown has more to do with inventory building/normalizing than an underlying deterioration in activity, but the 2% decline we saw in electronics (about 5% of revenue) is going to get worse from here. Given the capacity constraints and high-margin opportunities in aerospace, it probably won’t hit ATI too hard and won’t have to aggressively turn down business. , which may actually be a bit of a relief.
I still expect about 8% long-term revenue growth from ATI, but I think there’s a risk that the cycle could be a little longer. There is no proof of that. Parker Hannifin(PH)’s prediction that 18,000 aircraft will be built by 2030 would be wrong, but 2025 and beyond appears to carry more weight than previous projections.
As far as profit margins go, short-term headwinds haven’t helped investor sentiment, but at this point I don’t see anything changing my baseline assumptions further down the cycle. achievable with an FCF margin of
Conclusion
Given what has proven to be a more volatile ramp for commercial aerospace upcycling, we used our 2025 EBITDA estimate and a multiple of 9 to boost our valuation and divide by a double-digit discount rate. I decided to put it back. That process yields a fair value of $37.50, but we openly acknowledge the risks and challenges involved in valuing stocks based on projections that are several years ahead.
I continue to believe there is room for more upside in the stocks of companies that serve the commercial aerospace cycle. Clearly, there is still uncertainty regarding production schedules, competitor share/capacity, and profit margins, but as a major material supplier with virtually no excess capacity, I believe ATI has further advantages from here. increase.
[ad_2]
Source link
