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Allegheny, Tsingshan Team Up to Form Stainless Steel JV


Allegheny Technologies Incorporated ATI has entered into a definitive agreement to form a 50-50 joint venture (JV) with an affiliate company of Tsingshan Group, the world’s largest stainless steel producer.

The JV will produce and sell 60 inch-wide stainless sheet in North America and first shipments are expected early next year. The deal is subject to customary regulatory and anti-trust clearances, which are expected by first-quarter 2018.

About the JV

The JV company will operate under the name, Allegheny & Tsingshan Stainless. Tsingshan’s operation in Indonesia is vertically integrated and it will supply redi-to-roll slabs with reduced raw material cost volatility.

The Tsingshan-supplied stainless slabs will be hot-rolled into coils on Allegheny’s Hot Rolling and Processing Facility (HRPF) under a conversion agreement between the JV and ATI Flat Rolled Products (FRP). The hot-rolled coils will be finished into stainless sheet through the Direct Roll Anneal and Pickle (DRAP) line of the JV, which is a major investment of Allegheny in the JV.

The JV will be treated as a 50-50 equity investment under which the partners will share operating profit and cash flow generated by the JV. Moreover, sales of the JV will not be consolidated into Allegheny’s sales.

However, Allegheny’s FRP segment will gain from the increased utilization of the HRPF, conversion services provided by the HRPF to the JV, and FRP’s share of profits from the JV.

According to Allegheny, Aerospace & Defense that constitute roughly 50% of sales, will remain its biggest market. Consolidated sales of standard stainless sheet are expected to remain at or below 10% of the company’s total sales.

Allegheny reiterated that it remains focused on returning its FRP unit into a profitable business and position the segment for sustainable profitability regardless of trade policy or raw materials costs. The innovative JV along with its cost-reduction initiatives and strategic actions taken over the years are in line with this objective. The JV is poised to benefit Tsingshan and the customers in the North American stainless market.

Price Performance

Shares of Allegheny have moved up 39% in last three months, outperforming the 31% growth recorded by its industry.

Q3 Earnings In Line, Upbeat View on Improving Performance

Allegheny reported a net loss of $121.2 million or $1.12 per share for third-quarter 2017 compared with the prior-year loss of $530.8 million or $4.95. Barring one-time items, adjusted loss was 7 cents, in line with the Zacks Consensus Estimate.

Revenues for the quarter rose 12.8% year over year to $869.1 million, beating the Zacks Consensus Estimate of $865.1 million.

Moving ahead, Allegheny expects High Performance Materials & Components (HPMC) unit to maintain robust performance especially in the commercial aerospace. Further, the company expects the unit to deliver improved results in the fourth quarter compared with the third.

The FRP unit is expected to benefit from increasing raw material prices in the fourth quarter. The company sees operational improvements and product mix benefits to be carried over in 2018.

Allegheny Technologies Incorporated Price and Consensus

Allegheny Technologies Incorporated Price and Consensus | Allegheny Technologies Incorporated Quote

Zacks Rank & Key Picks

Allegheny currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are FMC Corporation FMC, WestRock Company WRK and Westlake Chemical Corporation WLK. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

FMC has an expected long-term earnings growth rate of 11.3%.

WestRock has an expected long-term earnings growth rate of 7.5%.

Westlake Chemical has an expected long-term earnings growth rate of 8.4%.

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