What happened
Shares of Allegheny Technologies (ATI 2.83%) dropped nearly 17% today after the company reported third-quarter 2018 financial results. The severe stock-price slide occurred despite the fact that operations kept humming along in a tough market environment. In fact, the specialty metals manufacturer continued to execute on its turnaround strategy by boosting key profitability metrics and delivering a sharp increase in operating cash flow for the first nine months of 2018 compared to the year-ago period.
The business clearly has momentum following investments in manufacturing efficiency, which allowed management to reaffirm full-year 2018 guidance for segment operating margin to improve by 300 basis points compared to 2017.
Fortunately for investors scratching their head over today's stock drop, it appears Mr. Market has changed his tune after having a few hours to digest the operating results. As of 12:20 p.m. EDT, the stock had settled to a loss of just 2.5%.
Image source: Getty Images.
So what
Allegheny Technologies delivered a strong third-quarter performance compared to the same three months in 2017. The business exploited healthy demand for next-generation aerospace products, as its high-performance materials and components (HPMC) segment grew operating profit 23% year over year. Meanwhile, a focus on higher-margin applications and increased reliance on 21st century manufacturing processes developed in-house helped the flat rolled products (FRP) segment to post an operating profit of $29.5 million in the most recent quarter. In the third quarter of 2017, the segment reported an operating loss of $7.3 million.
Investors can really see the business' year-over-year improvement when comparing the first nine months of the last two years.
|
Metric |
First Nine Months 2018 |
First Nine Months 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$3.01 billion |
$2.62 billion |
15% |
|
Gross profit |
$482.7 million |
$354.4 million |
36% |
|
Operating profit |
$287.4 million |
$52.5 million |
447% |
|
Net income |
$191.7 million |
($84.9 million) |
N/A |
|
Operating cash flow |
$116.6 million |
($53.8 million) |
N/A |
Data source: Press release.
While the operating profit, net income, and operating cash flow comparisons are a little dishonest because Allegheny Technologies took several asset impairment charges in 2017, the healthy year-over-year increase in gross profit demonstrates that the business is on much more stable footing this year. Additionally, the business saved roughly $40 million in interest expense and pension expenses in the first nine months of 2018 compared to the year-ago period, which all trickled down to operating income.
Management forecasts that the strength will continue in 2019, especially with the start-up of new supply agreements for the FRP segment. The company expects to generate $150 million in free cash flow for all of 2018 and end the year without any borrowings under its revolving credit facility -- a big step toward regaining investment-grade ratings in the future.
Now what
Long-term investors can find a lot to like in the company's third-quarter 2018 operating results. Allegheny Technologies is on the right path to achieving sustainable profits and cash flow to better withstand down cycles in commodity markets. While the United States' sudden reworking of global trade alliances has thrown a curveball into a key joint venture by placing tariffs on steel that was to be imported from Indonesia, the company is hopeful that its request for an exemption will be granted. It could be a major catalyst for the business -- or create a buying opportunity for long-term investors if analysts end up overreacting.
