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Allegheny (ATI) Q4 Earnings: Stock to Disappoint Again?

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Allegheny Technologies Incorporated (ATI - Free Report) is scheduled to release fourth-quarter 2016 results before the market opens on Jan 24.

The company reported adjusted net loss of 21 cents per share in the previous quarter, which was 90.91% wider than the Zacks Consensus Estimate of a loss of 11 cents. The results exclude non-cash impairment charges of $471 million, charges of $9 million related to excess operating costs at Rowley, and $173 million of tax benefits. Revenues for the quarter fell 7.5% year over year to $770.5 million, missing the Zacks Consensus Estimate of $839 million.

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

Factors at Play

Allegheny, a major supplier to commercial aircraft engine manufacturers, is expanding in the commercial airframes market. The company has a number of innovative new products in its arsenal that are expected to account for a fourth of its sales to the aerospace market by 2017.

Allegheny has undertaken several restructuring measures to improve its cost structure. These actions are likely to improve the company's annual operating income by about $50 million, starting 2017. Additionally, they are expected to generate cash flow of about $50 million from reduced managed working capital over the next several quarters.

Allegheny is seeing improved demand from aerospace OEMs, buoyed by production ramp-ups by Boeing and Airbus. Demand from the jet engine aftermarket is projected to grow on the back of higher airframe build rates. Based on healthy market demand, the company expects High Performance segment sales to the commercial aerospace market to reach around 70% of total segment revenue in 2016.

Allegheny is in the process of finishing several self-funded capital projects, some of which have already been completed, to augment organic growth and the cost structure. The company’s $1.2 billion Hot-Rolling and Processing Facility (HRPF) is now fully integrated into daily operations. It is producing high-value and standard flat-rolled products in wider, longer and thinner coils. The HRPF facility is anticipated to significantly boost capabilities of the Flat-Rolled Products division.

However, the FRP segment of the company continues to face a host of headwinds. Weak demand and increased Asian imports are putting pressure on stainless steel sheet plate prices. Demand for flat-rolled products in industrial markets also remains weak. The company did not expect much improvement in the FRP unit in the last quarter of 2016.

Moreover, Allegheny is facing pressure in terms of sluggish global economic recovery and overcapacity of competitive stainless steel. The uncertain global economic environment is expected to continue affecting demand for the company’s products. Moreover, depressed oil prices have created an uncertain environment for the company’s products in drilling applications in the oil and gas industry.

Allegheny has underperformed the Steel-Specialty Alloys industry over the past three months, partly due to disappointing third-quarter results and the headwinds faced the company. The company’s shares have lost 6% during this period compared with a rough 0.4% decline recorded by the industry.

Earnings Whispers

Our proven model does not conclusively show that Allegheny is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below:

Zacks ESP: The Earnings ESP for Allegheny is -27.27%. This is because the Most Accurate Estimate is pegged at a loss of 14 cents, while the Zacks Consensus Estimate is a loss of 11 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Although Allegheny’s Zacks Rank #3 increases the predictive power of its ESP, its negative ESP makes surprise prediction uncertain.

Note that Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

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

United States Steel Corporation (X - Free Report) has an Earnings ESP of +400% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Methanex Corporation (MEOH - Free Report) has an Earnings ESP of +53.33% and a Zacks Rank #2.

Carpenter Technology Corporation (CRS - Free Report) has an Earnings ESP of +166.67% and a Zacks Rank #3.

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