We are maintaining our Neutral recommendation on Titanium Metals Corporation .
The company recorded a profit of 17 cents per share in the second quarter of 2012, lagging the year-ago earnings of 18 cents but meeting the Zacks Consensus Estimate. Revenues increased 3.6% to $281.7 million, but missed the Zacks Consensus Estimate of $289 million.
Titanium Metals sees continued growth in the commercial aerospace sector over the long term as global fleet replacement extension in developing regions such as Asia, the Middle East and South America support future titanium demand. In order to meet the demand, the company has initiated several capital projects to increase melt capacity and improve efficiency at certain facilities in the U.S. and abroad, which are expected to finish in two years.
Titanium expects production rates across the commercial aerospace supply chain to remain strong in 2013 and accelerate over the next several years. Projected aircraft deliveries over the long-term horizon are also expected to remain strong as fuel efficiency and expansion of the global fleet in developing areas, such as Asia, the Middle East and South America, are expected to support future demand.
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 position it well to take advantage of opportunities for strengthening and expanding its presence in key markets.
However, revisions and delays in the build-out schedules of certain commercial aircraft, and its impact on production and inventory levels, are negatively impacting demand and selling prices. The company 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.
The cyclical nature of Titanium Metals’ commercial aerospace industry, which accounts for a major portion of the company’s business, creates uncertainty regarding its future profitability. Titanium also faces stiff competition from Allegheny Technologies Inc. (ATI - Free Report) and RTI International Metals, Inc. . We currently maintain a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.