Keeping Allegheny at Underperform

We are retaining our Underperform recommendation on Allegheny Technologies ( ATI - Analyst Report ) following its disappointing third quarter results. Earnings of 32 cents a share fell well short of the Zacks Consensus Estimate of 39 cents. Revenues sagged nearly 10% year over year to $1,220.5 million, also missing the Zacks Consensus Estimate of $1,297 million.

Allegheny saw a 43% decline in its profit as sluggish economic conditions led to weak demand for its products in the quarter. The Pennsylvania-based company cut its sales forecast for 2012 factoring in the current soft macroeconomic backdrop, sustained weak demand and aggressive inventory managements by its customers.

Allegheny, which competes with Carpenter Technology Corp. ( CRS - Snapshot Report ) among others, is one of the world’s largest and most diverse specialty metals companies. It 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 and differentiated product mix.

However, the company is contending with a soft economy and raw material cost pressures. Moreover, reduced raw material surcharges and low base prices of standard stainless products are hurting the results of its key Flat-Rolled Products division. Revenues from this segment slipped nearly 19% in the third quarter. Delays in some large oil and gases projects affected the segment’s results in the quarter.

Demand for the company’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, the soft U.S. and European economies remain as overhangs. The company envisions the business environment to remain challenging in the fourth quarter and its results to be lower sequentially. The uncertain economic environment given the concerns surrounding the U.S. fiscal cliff, euro zone debt crisis and slowdown in China is expected to weigh on the company’s results in the fourth quarter.

Our recommendation on Allegheny is in sync with a short-term Zacks #5 Rank (Strong Sell).