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Allegheny (ATI) Extends Purchase Agreement With Rolls-Royce

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Allegheny Technologies Incorporated ATI recently extended its long-term purchase agreement (LTPA) with Rolls-Royce. The company will continue to supply rotating disc quality specialty materials for Rolls-Royce’s Trent engine family. Notably, the move extends its agreement with Rolls-Royce through 2029.

The 10-year agreement includes production of a wide array of critical products used in manufacturing Rolls-Royce’s next-generation jet engines along with spare parts for in-service engines. It supports Allegheny’s broad production capabilities and market-leading alloy development, including iso-thermal forging operations.

Per Rolls-Royce, its supply chain needs timely delivery of the highest quality materials. The company has considered Allegheny’s track record of quality, cost and delivery performance as key considerations in awarding the contract. Also, the long-term agreement provides an opportunity for the parties to develop relationship along with engine production and services volume growth.

Shares of Allegheny have gained 8.2% in the past year compared with the industry’s 4.2% rise.

Allegheny, during fourth-quarter 2018 earnings call, stated that it expects year-over-year growth in operating margin and revenues in the High Performance Materials and Components (HPMC) segment in 2019 through focused growth in highly-differentiated materials and technologies, mainly for the jet engine market. The company targets high-single-digit revenue growth and segment operating profit margin improvement of 150 basis points year over year in 2019. This includes the unfavorable impact of higher retirement benefit expenses of around $8 million.

However, the company expects to witness significant price declines in several key raw materials in the flat rolled products (FRP) segment. This is likely to hurt Allegheny’s first-quarter 2019 results. It envisions 2019 results in the FRP segment to be in line with 2018 tally. Continued benefits from higher HRPF utilization rates and sales growth of high-value products are likely to be offset by the short-term raw material costs headwinds as well as higher retirement benefit expense (of around $23 million) in the segment.

Zacks Rank & Key Picks

Allegheny currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Kirkland Lake Gold Ltd. KL, Rio Tinto plc RIO and Materion Corporation (MTRN - Free Report) , each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland has an expected earnings growth rate of 8.8% for 2019. The company’s shares have surged 83.1% in the past year.

Rio Tinto has an expected earnings growth rate of 20.1% for the current year. The company’s shares have gained 17.4% in a year’s time.

Materion has an expected earnings growth rate of 12.6% for 2019. Its shares have gained 11.4% in a year’s time.

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