Morningstar | Narrow-Moat Allegheny Technologies Closes Out 2018 With Solid Results; Maintaining $33 FVE. See Updated Analyst Note from 22 Jan 2019
We view Allegheny Technologies' 2018 performance as a major turning point for the company. Allegheny restored significant free cash flow generation over the course of the year and cash generation should continue to improve in the coming years. Today's company looks quite different from the one that emerged cash-strapped and saddled with sizable pension and postretirement liabilities in 2015 after the conclusion of a major reinvestment cycle.We're maintaining our $33 per share fair value estimate for Allegheny. We continue to see attractive risk-adjusted upside potential for the stock. For 2019, we forecast $594 million of adjusted EBITDA and adjusted earnings of $1.94 per share on $4.28 billion of revenue. However, we forecast a material improvement in earnings power, as our midcycle (2028) earnings forecast is $3.19.
The company's impressive margin expansion story in its high performance materials & components, or HPMC, segment should continue in the coming years. Having achieved 245 basis points of operating margin expansion in 2018, management is guiding to another 150 basis points in 2019 to roughly 16%. In line with management's longer-term guidance, we forecast that HPMC operating margins will hit the 20% mark in 2021, a level not achieved since early 2011. Higher profits will continue to be supported by an improving product mix and the benefits of operating leverage as volumes rise.
However, we foresee modestly declining profits from the FRP segment over our explicit forecast period. Management guided to a slight operating loss in the first quarter, although healthy profitability should be restored through year-end 2019. We expect the segment to remain profitable each year in the future. The road to consistent profitability was paved via major restructuring efforts after the heavy losses suffered from 2013-2016.
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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