Morningstar | ATI Updated Forecasts and Estimates from 14 Nov 2018
Allegheny Technologies has historically provided little in the way of long-term guidance. However, the company's 2018 investor day materials provided more detail about its outlook through 2021. We share the company's view that significant profit growth is in store. The new guidance, however, indicates that the pace at which profits will grow should prove slower than we previously expected. Having tempered our forecasts, our fair value estimate falls to $33 per share from $35. Our narrow moat rating is unchanged.Most notably, management provided 2021 guidance to a 20% operating margin on $3 billion of revenue for the High Performance Materials & Components (HPMC) segment. Our forecasts are now roughly in line with this outlook, although we had previously booked a 22% margin on just over $3 billion of revenue in 2021. Additionally, we now expect HPMC operating margins to peak out at 22% rather than 24% before settling at a 20% midcycle level.
As a modest offset to a lower and slower HPMC profit trajectory, we increased our near-term margin outlook for the Flat-Rolled Products (FRP) segment. We still forecast only a 2% midcycle operating margin for the FRP business versus a 4.5% margin in 2018, but we now expect more gradual margin contraction.
All in all, Allegheny remains well positioned to boost free cash flow, with management forecasting more than $300 million of free cash flow in 2019 and beyond. Effectively all incremental profits will come from the HPMC segment as the ramp rate for next generation aircraft and next generation engine deliveries accelerates. From an end market perspective, our revenue growth forecasts through 2021 are roughly in line with those laid out by management (4% for airframes and space, 4% for aero engines, 2% for defense, 6% for oil & gas, and 5% for electrical energy). Additionally, higher utilization at the company's hot-rolling and processing facility should better support margins for the FRP business over time.
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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