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Bear of the Day

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Allegheny Technologies (ATI - Analyst Report) reported net income for the first quarter 2013 slumping 82% to $10.0 million, or $0.09 per share, on sales of $1.18 billion.

For this diversified maker of specialty metals products from stainless steel to titanium and superalloys, that was quite a drop compared with net income of $56.2 million, or $0.50 per share, on sales of $1.35 billion for Q1 last year.

But the Zacks Rank has been on top of this decline since the summer of 2011 when the stock was at $65. To be specific, ATI has spent most of its time as a Zacks #4 Rank (Sell) or #5 Rank (Strong Sell) in the past 22 months as it fell to back to 52-week lows this week near $26.

The Price & Consensus Chart, which plots annual earnings estimates against the stock price, says it all...

Heavy Metal Blues

Allegheny is facing an overcapacity of competitive stainless steel, according to a Zacks Equity Research report dated April 25. A significant portion of the sales under the High Performance Metals segment is made to customers in the commercial aerospace industry, a historically cyclical industry.

Although the aerospace market has shown some improvement recently, Allegheny expects continue to see a slower growth in its High Performance Segment, which generates a major chunk of revenues. Weak demand from nuclear energy is also expected to affect the division in the first half of 2013.

Delays in some large oil and gases projects (using Allegheny s nickel alloy flat-rolled plate) led to a decline in shipment in the company s core Flat-Rolled Products segment in 2012. Margins in the segment have been depleting as well.

Finally, rising input costs are putting margin pressure on all domestic steel manufacturers. These costs include scrap metals as well as energy.

For Allegheny, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $10 million to $12 million. Costs of scrap as well as that of oil are rising significantly.

A change of $1.00 per pound in nickel prices would result in increased costs of about $95 million, while a change of $0.01 per pound of ferrous scrap would result in increased costs of approximately $8 million.

Notes from the Boss

And the outlook from top of the company didn't give analysts any reason to believe the business is turning around any time soon.

"We saw continued sluggish demand from many of our major end markets during the first quarter," said CEO Rich Harshman. "While we see some signs of improvement as we enter the second quarter and it appears the fourth quarter 2012 may have been the trough in demand, we expect challenging conditions to continue to impact many of our end markets throughout the second quarter," he said.

"We believe our customers will continue to remain cautious as near-term global economic uncertainties remain, lead times remain short, and raw materials prices, especially for nickel and titanium scrap, remain under pressure."

Bottom line: The specialty steel makers as a group are currently ranked in the dungeon, 251 out of 265 in the Zacks Industry Rank system. Until the Zacks Rank gives us a heads up that earnings are turning the corner for steel makers like ATI, it's probably best to find other industries to invest in.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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