Jetlinerimages/iStock via Getty Images
Jetlinerimages/iStock via Getty Images
In my search for stocks with strong growth potential, I came upon metals manufacturer, ATI Inc. (NYSE:NYSE:ATI ). ATI manufacturers specialty materials and components on a global basis. The metals that are offered by the company are used in the aerospace, defense, medical, and energy markets. These metals are expected to be in demand for multiple years.
ATI's HPMC (High Performance Materials & Components) segment offers titanium alloys, nickel-cobalt alloys, superalloys, and advanced powder alloys. This segment comprises about 41% of ATI's total revenue. About 75% of this segment's revenue comes from the aerospace & defense markets. This segment is largely driven by products for jet engines.
The AA&S (Advanced Alloys & Solutions) segment comprises 59% of ATI's total revenue. The AA&S segment offers zirconium, hafnium, niobium, and other alloys. This segment also provides hot-rolling conversion services (carbon steel, titanium products).
Both segments serve the energy, aerospace, defense, auto and electronics markets. ATI derives 40% of total sales from the aerospace and defense industries, which are its largest markets. The company also has a strong presence in the energy industry.
Strong growth is expected in the major industries that ATI serves. The aircraft engine market is expected to grow at about 5.7% annually to reach $32 billion by 2028. This is important as ATI derives a large portion of revenue from aircraft engines.
Another driver of growth for ATI is likely to come from the defense industry. The global defense market is expected to grow at about 6.4% annually to reach over $25 billion by 2028. It is interesting to note that the COVID-19 pandemic hasn't significantly impacted the defense industry. Countries across the globe haven't reduced defense spending. In fact, various countries spent a total of $2 trillion on defense in 2021. The projected growth implies that the major countries throughout the world are likely to maintain strong spending for defense for the foreseeable future. ATI supplies materials for military jet engines and airframes.
The energy sector is another driver of growth for ATI. ATI has specialty materials such as corrosion-resistant alloys [CRAs] that are used in the electrical power generation field. The CRAs are used in natural gas, nuclear, and other fuel source systems. ATI's alloys are also used in solar, geothermal, and fuel cell applications. The global zirconium and hafnium market which is used in the energy sector is expected to grow at about 3.51% per year to 2028.
So, you can see how ATI's products are likely to experience multiple-years of growth demand in numerous thriving industries. This can help drive revenue and earnings growth for ATI over the long-term.
ATI is currently trading with an attractive forward PE of 12.9. This is based on expected EPS of $2.42 for 2023 (consensus). This is a little higher than the Metal Fabrication industry's forward PE of 11.26. However, ATI's forward PE is significantly lower than the S&P 500's (SPY) forward PE of 17.7. ATI and its industry are trading at a bargain valuation as compared to the broader market. This gives ATI's stock plenty of room to move higher as the company continues to grow.
ATI is expected to grow revenue at about 8% and earnings at about 17.5% in 2023 (consensus). ATI's above average top-line and bottom-line growth and the attractive valuation are likely to drive the stock to outperform the broader market.
The weekly chart above formed a cup and handle pattern during the summer. These patterns tend to breakout to the upside sometime after the handle forms (dip in the stock). The small cup and handle formed this summer followed a larger cup and handle pattern which formed over a year from the summer of 2021 to the beginning of summer 2022.
The RSI is above 50, but not yet overbought which is bullish for the stock. The green MACD line rose above the red signal line and remains above the zero line, reinforcing the stock's bullish momentum.
The money flow [CMF] increased from a negative level to a positive level over the past few months. This shows that money has been flowing back into the stock.
Overall, the technicals look positive for the stock to move higher.
ATI has 2.9x more current assets than current liabilities and 1.3x more total assets than total liabilities for shareholders' equity of $894 million. The company has over $274 million in cash and equivalents and about $1.7 billion in total debt.
Overall, ATI's balance sheet looks to be in a good position to handle the short and long-term debt.
ATI has a strong buy quant rating from Seeking Alpha which evaluates the stock on valuation, growth, momentum, and other factors. SA's strong buy quant ratings tend to outperform the S&P 500. The high rating may also help ATI to hold up better than the average stock in the event of a recession.
ATI has a positive outlook over at least the next 6 years as the growth in the aerospace, defense, and energy markets are likely to create tailwinds for revenue and earnings growth. The valuation is attractively low which leaves room for stock price appreciation. I expect the company's above-average growth to drive the stock to outperform over the next several years.
The main risk for the stock is the possibility of a recession within the next year. Although the company produces for some industries that are not economically sensitive, ATI's stock is likely to experience declines if the broader market drops. Another risk is the potential for cuts to be made in defense spending or aerospace investments.
Analysts have a one-year price target of $36 for the stock which is 16% above the current price. Of course, I think it is wise for investors to look beyond one year for ATI since the company is involved in multiple markets that are likely to experience multiple-years of growth.
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This article was written by
Through diligent analysis, he is ranked in the top 1% of blogging analysts on Tipranks.com for performance and accuracy. David previously contributed to Kirk Spano's Margin of Safety Investing [MoSI] Marketplace Service and Risk Research Inc.
David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy.
David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019.
He wants to help make people money by investing in high-quality growth stocks.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The article is for informational purposes only (not a solicitation or recommendation to buy or sell stocks). David is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.