ModernGraham Valuation: Allegheny Technologies (ATI)

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Company Profile (obtained from Google Finance): Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Company’s products include titanium and titanium alloys, nickel-based alloys and superalloys, zirconium, hafnium and niobium, advanced powder alloys, stainless and specialty steel alloys, grain-oriented electrical steel, tungsten-based materials and cutting tools, carbon alloy impression die forgings, and grey and ductile iron castings. Its specialty metals are produced in a range of alloys and product forms. It operates in three segments: High Performance Metals segment, Flat-Rolled Products segment and Engineered Products segment. On May 9, 2011, the Company acquired Ladish Co., Inc. In November 2013, Allegheny Technologies Inc has completed the sale of its tungsten materials business to Kennametal Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Calculator)

Key Data:

MG Value $0 — rare situation, see conclusion below.
MG Opinion Overvalued
Value Based on 3% Growth $11
Value Based on 0% Growth $6
Market Implied Growth Rate 18.37%
Net Current Asset Value (NCAV) -$13.32
PEmg 45.24
Current Ratio 2.30
PB Ratio 1.47

Balance Sheet – 9/30/2013 

Current Assets $2,693,500,000
Current Liabilities $1,168,600,000
Total Debt $1,542,200,000
Total Assets $6,599,300,000
Intangible Assets $728,100,000
Total Liabilities $4,132,600,000
Outstanding Shares 108,010,000

Earnings Per Share – Diluted

2013 (estimate) -$0.50
2012 $1.44
2011 $1.96
2010 $0.80
2009 $0.39
2008 $5.67
2007 $7.26
2006 $5.59
2005 $3.59
2004 $0.22
2003 -$3.87
2002 -$0.82

Earnings Per Share – Modern Graham

2013 (estimate) $0.74
2012 $1.59
2011 $2.18
2010 $2.85
2009 $4.08
2008 $5.44

Conclusion:

Allegheny Technologies presents a rare situation for the ModernGraham valuation model.  The earnings have been shrinking consistently over time, which leads the model to estimate negative growth and value the company extremely poorly.  Specifically, the EPSmg (normalized earnings) have dropped from $5.44 in 2008 to an estimated $0.74 for 2013.  Therefore, it is likely there is value in the company, but it does not come from the earnings at this time.  As for the requirements for the Defensive Investor and the Enterprising Investor, the lack of earnings growth negatively affects the company there as well, and the company does not appear suitable for either investor type at this time.  Any potential investor should do considerable research to determine whether Allegheny Technologies belongs in an individual portfolio, as there is significant risk involved with this company.

What do you think?  Is Allegheny Technologies overvalued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Allegheny Technologies at the time of publication and had no intention of entering into a position in the next 72 hours.

Photo Credit:  Andrew Magill


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