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On Oct 9, we upgraded our recommendation on metals processor Allegheny Technologies (ATI - Analyst Report) to Neutral. While pricing pressure and sustained weakness in standard stainless products business remain concerns, we are encouraged by the company’s cost management initiatives and improving demand in the aerospace market.
 
Why the Upgrade?
 
Allegheny’s profit for second-quarter 2013, reported on Jul 24, tumbled year over year on lower demand across a host of end markets and weak pricing. Both revenues and earnings for the quarter missed Zacks Consensus Estimates. Allegheny saw lower sales across its businesses in the quarter. The company is focusing on cost optimization and is accelerating its cost reduction efforts.  
 
Allegheny, a Zacks Rank #3 (Hold) stock, should benefit from its new alloys and products, diversified global growth markets and differentiated product mix. The company is in the process of finishing several self-funded capital projects which would help augment organic growth.
 
Allegheny's diversified footprint, focus on growth markets, new product/technology development initiatives and sustained focus on cost containment strongly place it for future growth. The company should gain from healthy demand across aerospace, oil, electrical energy and medical industries. It is seeing improving demand from aerospace OEMs.
 
Moreover, Allegheny continues to improve its cost structure with its gross cost reduction initiative. The company targets at least $100 million in cost reductions in 2013 and achieved roughly $79 million in cost savings during the first half.
 
However, Allegheny is contending with a soft economy and raw material cost pressures. Reduced raw material surcharges and low base prices of standard stainless products are hurting the results of its key Flat-Rolled Products segment. 
 
Weak demand and increased Asian imports are contributing to lower stainless steel sheet plate prices. Uneven domestic growth, slowing growth in China and weakness across Europe and Japan is also impacting demand from the construction and mining market.
 
Allegheny anticipates the business environment to remain challenging through second-half 2013 given the uncertain economic environment.
 
Other Stocks to Consider
 
Other companies in the basic materials sector with favorable Zacks Rank are Companhia Siderurgica Nacional (SID - Analyst Report), Shiloh Industries Inc. (SHLO) and Kobe Steel Ltd. (KBSTY). While Companhia Siderurgica and Shiloh Industries maintain a Zacks Rank #1 (Strong Buy), Kobe Steel holds a Zacks Rank #2 (Buy).

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