After a prolonged worldwide economic slump, we're finally seeing some consistent growth.
Yet this growth isn't happening rapidly -- and that's good news for investors, because rapid upward swings in the stock market often lead to rapid market corrections.
Instead, the market's made slow progress this year, going through a couple of corrections in February and April, then trading sideways in apparent preparation for the current upward move.
One of the market sectors heading upward is specialty metals -- and in that sector, I love Allegheny Technologies (NYSE: ATI), an undervalued gem (and one that I happen to hold in a personal model portfolio comprising what I think are this year's best stocks for growth and income).
Allegheny is a global leader in specialty metals and components. Its products include titanium and nickel alloys and a variety of steel products and other metals. The aerospace and defense industries make up Allegheny's biggest customer base, with a 35% share of total sales; international sales make up about 38% of Allegheny's total sales.
Amid a growing demand for (and improving pricing of) steel this year, Allegheny is increasing sales this year to jet engine manufacturing and the oil and gas supply chain. In addition, CEO Rich Harshman noted in Allegheny's first-quarter earnings report that the company's $1.8 billion backlog was at a two-year high.
Recent corporate activity includes the June purchase of Hanard Machine for its titanium investment castings business, the shuttering of Allegheny's iron-casting business in April, and the February acquisition of Dynamic Flowform Corp., which produces components made up of multiple alloys.
The company's sales and earnings are rebounding from a poor 2013, with aggressive growth expected in 2015 and 2016. Margins on earnings before interest and taxes (EBIT), which were only 0.9% in 2013, are expected to climb to 5% this year and to double in 2015. Sales are expected to climb 6% this year and 12% in 2015.
From an earnings per share (EPS) perspective, the company took a small loss in 2013. Wall Street's consensus estimates put Allegheny's expected EPS at $0.35, $2.19 and $3.35 in this year, next year and 2016, respectively. The key number to focus on is that 2015 EPS growth (a number with frequent upward revisions this year) is expected to be 526%.
Huge earnings growth is awesome, but you don't know if the stock's undervalued until you compare it with the price/earnings (P/E) ratio. Allegheny's 2015 P/E is 21. For a point of reference, a fairly valued stock generally has a P/E that's equal to its earnings growth rate. If the earnings growth rate is much higher than the P/E, as in Allegheny's case, that's a key indication that the stock price is too low -- and will likely climb toward a more fair valuation.
ATI shares have a current dividend yield of 1.6%, which is relatively high for an aggressive growth stock.
Nearly 300 financial institutions own Allegheny shares, accounting for more than three-quarters of its shares outstanding. The biggest shareholder is mutual fund giant Vanguard, which owns 7.3 million shares. Vanguard reaps $1.3 million from ATI dividends every quarter for its shareholders.
Allegheny's long-term debt-to-capitalization ratio is quite moderate, falling from 36% in fourth quarter 2012 to 27.9% in its most recent quarter. In addition to paying down debt, Allegheny has an ongoing focus on cost reductions and expects to cut costs by another $100 million in 2014.
Clearly, Allegheny Technologies is focused on fine-tuning an already successful business plan. However, ATI has posted only a small rebound after plummeting from its 2007 peak near $120 a share amid the financial crisis and Great Recession.
The current chart is bullish, reflecting a breakout on June 25. There's medium-term price resistance at $51, which means that the stock could easily climb that far uninterrupted, but then will likely pause for a while before climbing to the next resistance point at $57.
Risks to Consider: With a beta of 2.1, ATI shares are more volatile than the overall stock market. A recurrence of an economic downturn would likely weigh on the company's sales and profits. In addition, oversupply in the global steel market is restraining current sales.
Actions to Take --> With the stock currently on a slow uptrend, investors should buy shares of ATI. If the stock climbs back to the P/E of 37 it reached in 2011 and 2012, that would result in a price of $81.03, based on projected 2015 EPS of $2.19. That represents upside of about 75% from current levels.