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On Dec 9, we downgraded Allegheny Technologies (ATI - Analyst Report) to Underperform following its sluggish third-quarter 2013 results. Our view is based on its persistent weakness in its standard stainless products business, pricing pressure and a weak demand environment.
 
Why the Downgrade?
 
The metal processor posted a loss in the third quarter on Oct 23 due to lower sales and weak pricing. Charges associated with sale of businesses also weighed on its bottom line. Loss for the quarter was narrower than the Zacks Consensus Estimate while sales missed. Allegheny expects business conditions to remain challenging through the end of 2013 and potentially in 2014 due to U.S. debt ceiling and other fiscal policy issues.
 
Allegheny, a Zacks Rank #5 (Strong Sell) stock, 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.

Demand for Allegheny’s standard stainless products has been hit by rapidly falling raw material surcharges, resulting in customers delaying purchases. In addition, the same factors appear to be influencing short-term demand for some high-value products from some key end-markets as many customers are being cautious and keeping inventories lean.

Moreover, lower pricing, surcharges and decline in mill product shipments of nickel-based and specialty steel alloys and titanium and titanium alloys hurt revenues in the company's High Performance Metals segment in the third quarter.

Weak demand from jet engine aftermarket and nuclear energy is expected to continue to affect Allegheny’s results. Demand for forging from construction and mining markets also remains soft.

Allegheny does not see any significant improvement in global demand in the Flat-Rolled Products segment in the near term due to the lack of mega projects. The business environment is expected to remain challenging through the final quarter of 2013 given the uncertain economic environment.

Other Stocks to Consider

While we prefer to stay away from Allegheny, other companies in the basic materials sector with a favorable Zacks Rank include Companhia Siderurgica Nacional (SID - Analyst Report), United States Steel Corp. (X - Analyst Report) and Worthington Industries, Inc. (WOR - Snapshot Report). While Companhia Siderurgica carries a Zacks Rank #1 (Strong Buy),  United States Steel and Worthington Industries have a Zacks Rank #2 (Buy).

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