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Neutral on Titanium Metals

PCP ATI

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We are retaining our Neutral recommendation on Titanium Metals Corporation . Its third-quarter 2012 adjusted earnings of 12 cents per share missed the Zacks Consensus Estimate of 16 cents. Revenues edged down roughly 2% year over year to $257.7 million on lower volume and trailed the Zacks Consensus Estimate.

Moving ahead, the company sees continued strength in the commercial aerospace sector. Global fleet replacement extension in developing regions such as Asia, the Middle East and South America should support future titanium demand. To meet the demand, the company has also initiated several capital projects to increase melt capacity and improve efficiency across certain facilities in the U.S. and abroad.

In a major move, Titanium Metals recently penned a $2.9 billion merger deal with metal fabrication company Precision Castparts Corp. (PCP - Analyst Report). Under the deal, Precision Castparts has agreed to acquire all of the company’s outstanding shares for $16.50 per share in cash. Titanium Metals’ Board has approved the merger based on the recommendation of a special committee.

Titanium Metals has been successful over the last several years in establishing significant flexibility and cost advantages in its entire manufacturing process. The company’s financial strength and operating flexibility places it well to take advantage of opportunities for strengthening and expanding its foothold in key markets.

Titanium Metals expects production rates across the commercial aerospace supply chain to remain strong in 2013 and accelerate over the next several years. The company believes that its customer supply agreements will be instrumental in growing its aerospace business in the future.

However, Titanium Metals is likely to face higher raw material and energy costs from a shift in product mix toward higher concentration of mill products, which carry a higher unit-cost than melted products due to associated labor and overhead costs.

In addition, the cyclical nature of the commercial aerospace industry, which accounts for a major portion of the company’s business, creates uncertainty regarding its future profitability.

Titanium Metals, which competes with Allegheny Technologies Inc. (ATI - Analyst Report) among others, currently retains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.

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