KeyBanc: Comfort Around Flat-Rolled Margins, Valuation Leads To Allegheny Technologies Upgrade

The risk-reward on specialty metals company Allegheny Technologies Incorporated (NYSE: ATI) is more interesting despite tariff concerns, following the 15 percent pullback from January highs, an analyst at KeyBanc Capital Markets said.

The Analyst

KeyBanc analyst Philip Gibbs upgraded Allegheny Technologies from Sector Weight to Overweight, with a $31 price target, suggesting over 20 percent upside.

The Thesis

Greater comfort around the margin improvement potential of the flat rolled segment and a 2019 sum-of-the-parts valuation analysis that yielded an eventual value more than $35 are the reasons behind KeyBanc's upgrade, Gibbs said in a note.

The analyst sees the lingering concerns around the company's Flat Rolled joint venture with Tsingshan following prescribed Section 232 Steel tariffs of about 25 percent as an opportunity for long-term, "growth at a reasonable price," or GARP, investors.

The 2018 Street EBITDA/EPS estimates and Allegheny Technologies' segment profit guidance are achievable due to strength in stainless sheet market fundamentals and improving later cycle mix, Gibbs said.

KeyBanc sees a potential $50 million upside to its 2019 EBITDA estimates if an exclusion is granted to the company's hot-rolled stainless slabs over the coming months.

Among other equities belonging to the sector, the firm sees Carpenter Technology Corporation (NYSE: CRS), Haynes International, Inc. (NASDAQ: HAYN) and Universal Stainless & Alloy Products (NASDAQ: USAP) as possessing balanced risk-reward. The firm said these stocks could act defensively amid later cycle demand visibility.

The Price Action

Allegheny Technologies shares are up about 30 percent over the past year.

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