Keybanc Initiates TimkenSteel At Sector Weight, Notes 'Unique Assets Balanced With Oil & Gas Malaise'

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Shares of
Timkensteel Corp
TMST
were trading lower by nearly two percent late Monday morning after Philip Gibbs of KeyBanc initiated coverage of the stock with a Sector Weight rating with no assigned price target. TimkenSteel is a leading U.S. producer of special bar quality (SBQ) alloy steels and seamless mechanical tubing. As such, the company owns and operates within a "niche" market versus the broader carbon steel sector. According to Gibbs, Oil & Gas represents 20 to 25 percent of the company's total direct sales (as high as 30 percent when indirect markets are included) and represents 30 to 35 percent of its EBITDA. The analyst added that when overhead absorption of shared operating assets between its business units (Energy & Distribution and Industrial & Mobile) are factored in, Oil & Gas could "reasonably impact" nearly half of the company's total profitability. "We see TimkenSteel offering the purest play exposure within our coverage list to U.S Oil & Gas fundamentals, a source of both opportunity and uncertainty amid the current crude oil pricing backdrop," Gibbs stated. Gibbs further noted that approximately 70 percent of the company's total operating costs are variable while its base pricing has been "stable" over the past few years. The analyst stated that it is now "reasonable to assume" pricing degradation in Industrial & Mobile (down one percent) and Energy & Distribution (down five percent) beginning in the first quarter of 2016. As such, every $10/ton, or one percent decline, in company-wide base pricing reductions impacts EBITDA and earnings per share by roughly $9 million and $0.13, respectively. Finally, Gibbs pointed out that the company has "proven" it can perform at an EBITDA breakeven level around 50 percent crude steel capacity utilization (its current level is around 45 percent) versus its average five-year utilization rate of 65 percent. In addition, new capital investments should provide cost and capability benefits over time. Bottom line, Gibbs acknowledged that the company could see "meaningful" EBITDA recovery to 2014 levels, but not until at least 2018. As such, investors should exercise "patients" until "healthier" fundamentals emerge.
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Posted In: Analyst ColorAnalyst RatingsKeyBancOil & GasPhilip GibbsSteelStimkensteel
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