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Is Allegheny (ATI) Poised for a Beat this Earnings Season?

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Allegheny Technologies Incorporated (ATI - Free Report) is scheduled to release its second-quarter 2016 results before the market opens on Jul 26.

The company reported an adjusted net loss of 58 cents per share in the first quarter of 2016. The adjusted loss was narrower than the Zacks Consensus Estimate of a loss of 59 cents by 1.69%.

The results exclude restructuring charges and transformation charges of $9 million, pre-tax costs related to work stoppage and return of USW-represented employees of $26 million, and tax benefits of $12 million. Including these charges, the company reported a net loss of $101 million, or 94 cents per share for the quarter. Results were negatively affected by lower efficiency of operations due to the halt of operations and return of workers. The quarter saw sales of $758 million, which missed the Zacks Consensus Estimate by 0.34%.

Let’s see how things have shaped up for the forthcoming announcement.

Factors at Play

Allegheny is undergoing drastic restructuring and reorganizing to convert the currently incurred losses into profits in the future.

The High Performance & Components (HPMC) Segment is well positioned for growth in the long term, particularly due to the increasing demand from commercial aerospace. The segment has several long-term agreements on legacy as well as next-generation airplanes and their jet power engines. These contracts will provide the segment with sustained profitable growth. Increased volumes are expected to improve utilization and product mix of the mills for the rest of 2016. The company expects the segment to grow throughout the year, with operating profits as a percentage of sales returning to low double digits in the second half of the year.

For the Flat Rolled Products (FRP) segment, the company intends to continue its focus on the restructuring activities. Management aims to focus on differentiated products that have more technical barriers to entry and serve markets, along with high long-term growth prospects.

In first-quarter 2016, the company idled its Midland, PA-facility and re-negotiated contracts with USW-workers which reduced retirement benefit expenses for the future. These actions are expected to return the segment to profitability in the future. Although some inefficiencies of the first quarter may negatively impact second-quarter results, operating losses are expected to reduce in the quarter and profits are anticipated from the second half of 2016.

The segment’s largest end users continue to be the oil and gas chemical processing and hydrogen processing industry. However, the aerospace and defense industry is gaining prominence. The change in the segment’s market is due to an increase in demand in the aerospace and defense sector, the company’s new HRPF capabilities and its ability to cater to existing Allegheny customers. Further, management is optimistic about the future of the aerospace industry.

Allegheny is also seeing higher demand from the automotive sector. Although the company has reduced the production of most commodity exhaust alloys with the idling of the Midland facility, it continues to offer specialty grades for auto exhaust applications. The demand for nickel-based and specialty alloys for automotive applications has been rising.

Allegheny has been striving to increase its cash generation from the beginning of 2016 and continue the same for the rest of the year. Capital expenditure in 2016 is estimated to be below $240 million for the expansion of current plants, of which $70 million has already been made in the first quarter. Since the company will be utilizing much of the cash generated in the first half, positive cash flows are expected in the second half of the year.

Management is strategizing to make the company profitable in the long run with higher projected growth rates. However, all profitable projections are for the long term and the company is expected to continue facing loses in the second quarter.

ALLEGHENY TECH Price and EPS Surprise

ALLEGHENY TECH Price and EPS Surprise | ALLEGHENY TECH Quote

Earnings Whispers

Our proven model shows that Allegheny has the right combination of two key ingredients to beat estimates.

Zacks ESP: The Earnings ESP for Allegheny is +2.56%. This is because the Most Accurate Estimate is pegged at a loss of 38 cents, while the Zacks Consensus Estimate is at a loss of 39 cents. This indicates a likely positive earnings surprise.

Zacks Rank: Allegheny’s Zacks Rank #3 (Hold) increases the predictive power of its ESP.

Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 or 5) should never be considered going into an earnings announcement.

Stocks to Consider

Here are some other companies in the steel space you may want to consider as our model shows they also have the right combination of elements to post an earnings beat this quarter:

AK Steel Holding Corporation has an Earnings ESP of +50.00% and a Zacks Rank #2.

Ryerson Holding Corporation (RYI - Free Report) has an Earnings ESP of +7.69% and a Zacks Rank #2.

Carpenter Technology Corp. (CRS - Free Report) has an Earnings ESP of +3.03% and a Zacks Rank #3. 

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