Outlook Should Be The Focus For Allegheny's Q3 Report, Says Buckingham

The brokerage cut its non-GAAP third quarter/2016 EPS view to $(0.19)/$(0.81) from $(0.01)/$(0.69) to reflect a lower cost reduction benefit than earlier expected. The brokerage's $(5.01) GAAP EPS estimate for the third quarter includes a $334 million ($4.83) charge for idling the Rowley facility and a $1.71 tax valuation allowance.

"While we expect a disappointing 3Q16 print and for the stock to initially come under some pressure, we think improving end market commentary and the 2017 outlook will likely drive the stock higher," analyst Richard Safran wrote in a note.

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Safran believes a lot of negative sentiment is already in the stock, as investors would mainly focus on the following:

• Commentary about 2017 EPS.
• FCF commentary.
• HRPF.
• Aerospace OE production ramp.
• End of cycle concerns.
• Demand for commodity metals.

Rating, Valuation And Justification

The analyst, who reiterated his Buy rating and $21 target price, expects 2017 EPS of $1.15 that is well above $0.77 consensus.

"While we think ATI will express concerns about Flat Rolled growth in 2017 (we expect 1 percent y/y), we also think ATI will cite higher commercial aircraft build rates and a better mix driving High Performance growth (we expect 9 percent y/y)," Safran higlighted.

Meanwhile, near-term concerns center on expectations that Boeing Co BA will lower B777 production rates. But, Safran noted that ATI has very little content on the B777 or the GE 90 engine.

The price target of $21 implies 18x Safran's 2017 estimated EPS of $1.15 and 8x his 2017 estimated EBITDA of $458 million. ATI currently trades at 16x his 2017 estimated EPS of $1.15, below peers at 17.5x.

At time of writing, shares of Allegheny fell 2.87 percent to $17.63.

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