Should You Add Allegheny To Your Portfolio Now?

On Dec 30, 2014, Zacks Investment Research upgraded Allegheny Technologies Inc. ATI to a Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell).

Why the Upgrade?

Allegheny posted breakeven results in the third quarter of 2014, which beat the Zacks Consensus Estimate. Sales improved year over year backed by gains across the board.

In Nov 2014, Allegheny announced that it has received more orders for its nickel-based alloy plate used in large oil and gas pipeline projects. These orders will be shipped in late fourth-quarter 2014 through the first half of 2015. Notably, the company had already booked initial orders for this project.

Allegheny expects the orders to generate total revenue of nearly $145 million, making it the largest participation in a project in its history. In fact, expected revenues from this project are greater than 25% of the company's sales to the Oil & Gas/Chemical Process Industry in the first nine months of 2014. Allegheny's Flat Rolled Products segment and the premium quality of its nickel-based alloy plate helped it to secure a major share of this project.

Allegheny is a significant supplier to commercial aircraft engine manufacturers and is expanding in the commercial airframes market as well. The company has a number of innovative products scheduled to be launched that are expected to account for a fourth of its sales to the aerospace market by 2017. Allegheny is seeing improving demand from aerospace OEMs, buoyed by production ramp ups by The Boeing Company BA and Airbus.

Allegheny is in the process of finishing several self-funded capital projects — some of which have already been completed — to augment organic growth and cost structure. The company's $1.2 billion Hot-Rolling and Processing Facility (HRPF) project remains on schedule. The company is currently progressing with the hot-commissioning process with expected completion in end-2014. The facility will manufacture all of Allegheny's flat-rolled products and improve cost structure of the business with benefits starting 2015. The HRPF project is expected to significantly boost capabilities of the Flat-Rolled Products division.

Allegheny continues to improve its cost structure with its gross cost reduction initiative. The company has already achieved roughly $105 million in gross cost reductions this year.

Allegheny is benefiting from the secular shift to new titanium-intensive airframes, new energy efficient engines and an expanding aftermarket. Strong growth in demand for many products is expected from the oil and gas/chemical process industry. Global demand from the electrical energy market is also expected to grow considerably driven by increased need for natural gas turbines, nuclear applications, alternative energy applications and from the building and rebuilding of transmission infrastructure. Medical market demand for titanium, zirconium, specialty and niobium alloys is expected to continue to grow significantly.

Nevertheless, Allegheny realizes a significant portion of the sales under the High Performance Metals segment from customers in the commercial aerospace industry which has historically been cyclical. Although the aerospace market has shown some improvement recently, we expect the company to see slower growth in its High Performance Segment.

Stocks to Consider

Some better-ranked companies in the steel industry worth considering are Kobe Steel Ltd. (KBSTY) and Carpenter Technology Corp. CRS. While Kobe Steel sports a Zacks Rank #1 (Strong Buy), Carpenter Technology carries a Zacks Rank #2 (Buy).