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We are downgrading our recommendation on Allegheny Technologies (ATI - Analyst Report) to Underperform considering the raw material cost pressure and weakness in its Flat-Rolled Products division.

The company saw its profit decline in first-quarter 2012 due to increased costs -- in particular, higher retirement expenses. Earnings of 50 cents a share matched the Zacks Consensus Estimate while revenues (of $1,352.5 million) missed the forecast.

Allegheny is one of the world’s largest and most diverse specialty metals companies. It competes with Carpenter Technology Corp. (CRS - Snapshot Report) among others. Allegheny is a significant supplier to commercial aircraft engine manufacturers and is also expanding its footprint in the commercial airframes market.

Allegheny is expected to benefit from its new alloys and products, diversified global growth markets, differentiated product mix and healthy demand across aerospace, oil, electrical energy, gas/chemical process and medical industries.

However, Allegheny is contending with cost-pressures associated with raw material inflation. Rising input costs are putting margin pressure on all domestic steel manufacturers.

Moreover, lower volumes, reduced raw material surcharges and low base prices of standard stainless products may affect the results of the company’s Flat-Rolled Products division.

Demand for the company’s standard stainless products has been hurt 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, the soft U.S. and European economies remain as overhangs and the sustained high unemployment levels may impact short-term consumer confidence. Our recommendation on Allegheny is in agreement with a short-term Zacks #5 Rank (Strong Sell).

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