Allegheny Technologies Incorporated (ATI), Precision Castparts Corp. (PCP): Specialty Metals, Vertical Business, and Diversity for Your Portfolio

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Back in the 90’s, visiting farms during harvest season was an everyday activity. Dad owned a few Senor B6 models that had many issues with metal parts. Ironically, it remains branded as ‘The Big One by Senor.’ A distinguished characteristic is the complex system of levers and pulleys that give way to a new task and a new breakage. Some were due to design defects, many others a consequence of bad steel.

Allegheny Technologies Incorporated (NYSE:ATI)

However, there are three companies that are pushing the envelope in the metal industry in order to make harvesting easier, and frying safe: Allegheny Technologies Incorporated (NYSE:ATI), Precision Castparts Corp. (NYSE:PCP), and Carpenter Technology Corporation (NYSE:CRS).

Ride the lightning

To value a company, one must look beyond the stock price. In case of Allegheny, the task is somewhat complicated by its long-term revamping plans, and analysts constantly search for signs. The company has seen its stock price take a beating during the last two years. For the same reason, the stock will be looked upon to show its hidden potential.

First, Allegheny Technologies Incorporated (NYSE:ATI) has embarked on a deep reform of its business model. The flat-roll steel model is yet to expire, but the company is moving ahead to higher-margin alloy products. At the same time, the firm has progressively cut costs through an internal initiative. Last, acquisitions and investment on capital have reduced its exposure to foreign markets and to the industry’s cyclicality. The scheme has paid-off since the economic slowdown has not dented its balance sheet or leading market position.

Second, restructuring implies widening its specialty alloys offering, which has seen a rise in demand. Hence, Allegheny Technologies Incorporated (NYSE:ATI) has gained an edge over competitors attached to the lower-margin steel business model. The specialty alloys segment accounts for 40% of sales and generates most of the company´s profit. Demand for specialty alloys is expected to increase, as new commercial airliners require stronger and lighter metals for their engines. Also, the defense sector is putting a great emphasis on UAV (unmanned aerial vehicles), additionally increasing the demand for the same product.

Third, Allegheny Technologies Incorporated (NYSE:ATI) has completed acquisitions and capital investments in order to meet the increasing demand and assure the necessary backlog to maintain sane finances. Vertical integration has been the guiding vector for acquisition and capital investment. The company’s building of a new titanium sponge facility and acquisition of Ladish go in line with this business integration and should help meet incremental demand.

In all, Allegheny Technologies Incorporated (NYSE:ATI) is financially sane even with a rising debt-to-cash ratio. Most importantly, the company’s tight restructuring towards specialty metals is already providing incremental earnings. Also, expansion of the aerospace industry will provide new sources of revenue. Trading at 28 times its earnings, it is recommended to buy this firm’s stock before price scales back up.

Master of puppets

In comparison with Allegheny Technologies Incorporated (NYSE:ATI), Precision Castparts Corp. (NYSE:PCP) has been able to steadily climb up the Fortune 500 list. The company’s wide portfolio and global reach make it a unique contender. Since the beginning of time, the firm has focused plenty of efforts on diversifying, and acquisitions gave way to a vertical business model, whose height and width created an economic moat for the corporation.

Size matters, and Precision Castparts Corp. (NYSE:PCP)’s dimensions made it possible to benefit from the rising demand for cars and commercial airliners. In the case of airplanes, the company is generating more revenue per flying plane, because more parts per engine will be provided and at a higher retail price. Moreover, high switching costs for customers make its moat even wider. Some have been clients for over 40 years now, proving client loyalty and stickiness. Hence, it is expected for revenue to sustain current levels even if no new planes roll out of the factory.

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