Morningstar | Allegheny Guides to Surprisingly Weak 1Q; Reducing Our FVE to $31 on Lower Near-Term Profits
Allegheny Technologies shares traded sharply lower on April 12 after the company guided to soft first-quarter profits. Management expects earnings per share of $0.10-$0.13, a significant decrease from adjusted EPS of $0.32 in the same period last year.Although our long-term outlook is effectively unchanged, we've tempered our near-term profit outlook for both segments. For 2019, our companywide adjusted EBITDA forecast falls to $558 million from $593 million, a material decrease. Our revenue forecast is unchanged at $4.26 billion, as the headwinds appear to be primarily from supply chain and operational issues rather than disappointing end-market demand. Our fair value estimate falls to $31 per share from $33 and our narrow moat rating is unchanged.
We continue to view the shares as undervalued, as they remain in 4-star territory. Even after reducing our near-term profit outlook, Allegheny maintains impressive long-term momentum on the margin expansion front. We still expect the company to deliver higher operating margins this year, which would represent the fourth consecutive year of margin expansion. Additionally, management expects the company's recent headwinds to soften in the second quarter and to have no impact on results in the second half of the year.
As commercial aerospace demand for high-value product lines continues to drive an improving product mix and the benefits of operating leverage, we see further margin expansion ahead. We forecast that operating margins will rise above 13% by 2023 from 9% this year, although our subsequent midcycle operating margin assumption is 11%. Peak profits in 2023 would translate to earnings of $3.70 per share (less than 7 times the current stock price). Given our outlook, today's sell-off represents an attractive entry point.
Allegheny Technologies is a manufacturer of specialty materials and components. The company operates in two business segments: High Performance Materials and Components, which produces a range of specialty materials, parts and components for several main end markets, including aerospace and defense, medical, and energy; and Flat Rolled Products, which produces nickel-based alloys, specialty alloys, titanium and titanium-based alloys, and stainless steel in a variety of forms including plate, sheet, engineered strip, and Precision Rolled Strip? products.
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