ATI - ATI: Earnings Need To Catch Up With High Valuation

Summary

• ATI's high valuation in absolute terms and compared to peers.
• Asset Manager cuts stake in the company by nearly 20%.
• Expanding earnings growth only partially justifies the surge in stock prices.

ATI (ATI) has been in a strong bull trend since late 2020. However, it looks like the market may have gone too far in pushing up this company's stock price. And it seems State Street also believes now is a good time to take some profits in their stake in ATI.

On February 1, State Street filed a 13G/A with the SEC reporting a decrease in shares owned by 19.66%. The current filing shows State Street owns 6.96 million shares or 5.38% of total shares. While their previous filing, dated February 10, 2022, showed they owned 8.66 million shares or 6.81%.

State Street hasn't dumped the stock, and it looks to me like it's a pure profit-taking play. In fact, they still own over 5% of the company. Or it could be a portfolio readjustment but in any case, they haven't lost faith in the company.

The company just released Q4 2022 earnings and we saw EPS beat expectations by $0.01. And revenue was in line at $1.01 billion. That doesn't exactly show they are catching up quickly with their very high valuation.

Personally, I do like the company and its long range of products serving several industries. They specialize in specialty materials, creating alloys of various kinds. ATI is concentrating mainly on aerospace and defense, two very large markets.

However, they also cater to the electronics, medical, and energy markets. They produce metal alloy sheets, rods, bars, and tubes as well as a variety of specialized components. I think their specialization makes them have added value, although I'm not sure if the multiples of earnings justify current prices.

We'll look at that more closely in a minute, and we'll take a look at some other fundamentals I consider as well as industry trends and technical view.

ATI Fundamentals

This company doesn't pay dividends so higher multiples in price earnings ratios are common. However, they aren't so common for some of the ratios in question. P/E TTM is 192.85 that's high in absolute terms even compared to large cap companies like Amazon ( AMZN ), and it's 1,312% higher than the sector average.

The ratio I look at, enterprise value to EBITDA is also high, although not as much as P/E. The EV/EBITDA ratio for ATI is 13.32 TTM, 75.86% higher than the sector average which is 7.57.

What ATI does have is rapidly expanding EPS and Net Income, both have increased considerably over the past 4 quarters. In Q3 2022, ATI turned from a negative net income of $29.8 million in Q4 2021 to a profit of $61.1 million. And Q4 2022 showed a further increase of 26% over Q3.

The liabilities to assets ratio is of concern as it has grown in comparison to its level in 2019 and is high in relative terms. ATI's liabilities to assets ratio was 0.611 in 2019 while the latest figure stands at 0.781.

However, the ratio has come down from 0.841 in 2020, the cost of the pandemic restrictions, I presume, taking its toll on this ratio too. However, ATI's ratio is still high compared to its peers which had an average of 0.45.

Industry Trends

The report by Global Market Insights forecasts the metal alloy market growing by 5.1% CAGR from 2022 to 2030. Their current valuation of the market size is at $291 billion, with the expected CAGR bringing the value to $466 billion by 2030.

The analysts expect most of the demand to come from an increase in demand from the transportation sector and increasing construction investments around the world. The report puts Transportation as the fastest growing sector through 2030.

Quant Rating

The Quant rating for this stock is a hold with a score of 3.09. The major deficiencies among the 5 factors come from Valuation and Revisions. Valuation gets a flat D, and we have already seen why. While the revisions factor has been impacted most by 6 down revisions and no up revisions over the past 90 days.

Technical View

The long-term trend that emerges from the monthly chart is bullish. However, share prices are approaching a resistance area (horizontal black line) at $45.91, coupled with the RSI at 70. The last time this stock broke the 70 level on the monthly chart was back in 2005.

The momentum pushed the company's stock prices to an all-time high by April 2007. Having said that a break above 70 may indicate more bullish momentum but share prices would meet resistance at the level mentioned above.

On the other hand, if price momentum fails to bring the RSI above 70, I would expect a retracement in prices towards the fast moving average (blue line), currently at $29.43

The weekly chart also shows an ongoing bullish trend with higher highs and lows since its low in March 2020. This week's price action has taken the last candle above the blue resistance line. A close above this line would indicate further bullish momentum to the black resistance line at around $45.91.

The RSI is currently above 70, if the weekly chart manages to maintain current levels or higher that would mean an indication of further bullish momentum. We can see that the previous two breaks above the 70 level gave way to several weeks of an extended rally.

Note that both of those rallies gave way to major corrections in price, although the underlying bull trend was not challenged.

Conclusion

ATI is a leading producer of specialty metals and alloys. The company has a well-diversified product portfolio, a strong market position in aerospace and defense, and a commitment to innovation and technology.

ATI is well positioned to take advantage of increasing demand for its products in a range of end-market applications. However, ATI also faces several challenges, including high costs and volatility in raw materials prices, intense competition, and cyclical demand for its products.

The company's financial performance can be impacted by fluctuations in the global economy and changes in demand for its products. Overall, a rating of Hold for ATI's stock seems appropriate.

You may want to consider a more cautious approach to the stock, given the uncertainties and challenges that the company faces. However, for those willing to accept the risk, ATI's strong market position and commitment to innovation suggest that the company may offer long-term growth potential.

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