ATI Inc. (NYSE:NYSE:ATI ) is a manufacturer and distributor of specialty components and materials to the global aerospace & defense, energy, and medical markets. The company is recovering from the negative impact of Covid-19 with the rising aerospace and defense market demand. The company has entered into a multi-year agreement with GKN Aerospace which can support the rising demand.
ATI produces and distributes specialty components and materials to the global aerospace & defense, energy, and medical markets. The company earns the largest part of its revenue from aerospace & defense, which is 40% of total sales. The company reports its revenue under two operating segments: High-Performance Materials & Components (HPMC) and Advanced Alloys & Solutions ((AA&S)). The HPMC segment manufactures and sells aero-engine materials & components and represents 41% of the total revenue. The HPMC segment generates 75% of its revenue from aerospace & defense markets. Most of the HPMC's revenue and EBITDA growth over the past few years has come from commercial aerospace products, which might continue in the future as the company has experienced a fast demand recovery of commercial aerospace products from the 2020 pandemic levels.
Revenue Classification (Annual Report of ATI)
Revenue Classification (Annual Report of ATI)
The AA&S segment provides high-value flat products primarily to aerospace & defense and energy end-markets and generates 59% of the total revenue. Titanium & titanium-based, specialty, and nickel-based alloys are all manufactured under the AA&S segment in various forms, including plate, sheet, and strip components. The company might experience margin growth driven by the Specialty Rolled Products (SRP) business as SRP will help the company to get rid of lower-margin stainless sheet products and allocate the capital investments to focus on higher-margin products. After the completion of the SRP business, the company can save $15 - $20 million cost of production in FY2022. The company has ample liquidity and cash to allocate the capital investment in higher margin products, reduce debt or return capital to shareholders. The company has recently ended its second quarter with liquidity of $730 million, representing 18.8% of the total market capitalization, of which $274 million (7% of total market capitalization) comprises cash on hand. The company has signed a new multi-year agreement with GKN Aerospace which can significantly contribute to aerospace demand expansion in the coming years.
For the last two years, the revenue and earnings of the company have been affected by the Covid-19 pandemic. The company's revenue decreased by 28% in FY2020 compared to FY2019's revenue. The company also reported a net loss per share of $0.52 in FY2020.
Revenue Trend of ATI (Seeking Alpha)
Revenue Trend of ATI (Seeking Alpha)
The company's poor performance over the last two years was driven by low product demand. Currently, the company is recovering from the impact of covid-19 with the help of strong aerospace demand. The demand for jet engines has significantly grown, which is also translated into the financials of Q2FY2022. Revenue from jet engine recovery has increased by the 92% YoY in Q2FY2022. The company reported revenue from commercial airframes of $106.1 million in Q2FY2022, which is a growth of 95% as compared to $54.4 million of Q2FY2021. Overall revenue from the Aerospace & Defense market has increased by 55% YoY in Q2FY2022.
I believe the growing demand from the Aerospace & Defense market might continue in the coming years as the company has signed a new multi-year agreement with GKN Aerospace to provide high-value titanium materials. These materials are used to manufacture military and commercial airframes. According to this agreement, ATI has received the contract to supply the majority share of GKN Aerospace's total requirement of titanium plate and sheet products. The effects of these contracts might be visible on the financials from Q3FY2022. I think this agreement can provide stable demand flow for the company as it is a multi-year agreement. I believe the company can recover from the effects of Covid-19 sooner than expected, as the company is also focusing on the strategic repositioning of SRP, which can expand the margins with higher margins products and $15 - $20 million cost savings. The effects of this event could be visible in the financials of the third quarter of FY2022. I think with strong demand from aerospace and strategic repositioning of the SRP, the company is at the inflection point, and the investors can expect robust growth in the coming years.
The company depends heavily on external parties to provide some raw materials essential to creating its products. These essential items' purchase costs and availability are volatile. The firm may occasionally be unable to do so on time, at a price, or under other suitable circumstances. There might not be any other supply options available to the organization if suppliers raise the price of essential raw materials. Additionally, the company might not be able to increase the price of products to compensate for the increased cost of production if it has offered prices to clients and taken orders for items before obtaining the necessary raw materials or existing contracts. The majority of the commodities the firm utilizes have had fluctuating costs over the previous few years. The fluctuation of prices of raw materials exposes the company to cash expenditures which might not recover completely through increased pricing methods due to the long lead times needed to produce many products. Some products require longer lead times and a complex manufacturing process. As a result, the delivery of raw materials to the company can encounter shortages or delays.
In particular, the corporation imports crucial raw materials from outside, such as titanium sponge, nickel, niobium, zirconium, chromium, vanadium, and cobalt, that it utilizes to make specialty products. Some of these sources are based in countries that might experience political and economic instability. For example, the company obtains nickel and chromium from Russian sources, which may be affected by recent issues involving Russia and Ukraine and any economic sanctions or other responses taken by the United States or other countries. These or comparable conditions can disrupt supplies or impact the pricing of the commodities that are critical to production. It's possible that the business won't be able to make enough products on time if it can't get adequate and timely supplies of the necessary raw materials. This could significantly influence sales and the company's profitability.
Technical Analysis Chart (Investing.com)
Technical Analysis Chart (Investing.com)
The stock currently trades above its 50-day and 100-day weighted moving averages (WMA). This reflects strength and momentum in the stock. The 50-day WMA has recently crossed the 100-day WMA, which could translate into a strong upside in the stock price in the future. The stock is consistently sustaining over its 100-day and 50-day WMA, which is a strong buy indicator. As per the RSI indicator, the stock is trading between the 50-60 RSI band range. This range is generally considered a buying range. The stock could soon test the 70-RSI band range, which might result in a fresh momentum in the stock. The technical indicators reflect a buying opportunity in the stock.
ATI is trading at a stock price of $30.16. The stock price has seen a 71% increase in the past year. The main reason behind this increase was the company's improved financial performance. ATI is trading at a forward P/E ratio of 14.6x with the EPS estimate of $2.06, compared to the sector median P/E of 11.24x. The stock is trading at a higher P/E multiple than the sector standards. However, given the company's growth, I believe the stock is still undervalued because, for growth companies, the better valuation method is the PEG ratio evaluation. The company is trading at a PEG ratio of 0.09x, compared to the sector PEG ratio of 1.1x. For growth companies, a PEG ratio below 1x is considered good.
Given its solid growth trajectory, I believe the stock has huge upside potential from current price levels. I think in the best-case scenario of rising demand from the aerospace market and margin expansion, the company can trade at a P/E ratio of 25x as it gives a PEG ratio of 0.02x, which is still significantly below its sector median. With the P/E ratio of 25x and EPS of $2.06, the target price for FY2022 will be $51.5, which is a 71% upside from current levels. In the bear-case scenario of volatile raw material availability and prices, I think the P/E ratio of 22x as the share price might lose momentum in coming quarters if the company misses EPS estimates due to margin contraction. I estimate the EPS and P/E ratio of the bear case scenario to be $1.70 and 20x, respectively, which gives a target price of $36, representing an upside of 20%.
The rising demand from the aerospace industry is a major growth driving factor for the company. ATI is on a solid growth trajectory, and I believe it will maintain this growth even in the coming quarters. It has strong technical indicators, and the company is undervalued as per the PEG ratio analysis. The company faces the risk of cyclicity of demand, but there has been no significant impact of this risk on the company's performance. I assign a buy recommendation for ATI considering these factors.
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