A Strong Industrial Materials Play
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Titanium Metals (UNKNOWN: TIE.DL) is a leading manufacturer of milled and melted titanium products used in aerospace, various industrial markets, and the defense industry. The company has an immediate competitive advantage as the only titanium production facilities in both the United States and Europe, the two largest markets for titanium consumption.
The titanium industry has been heavily reliant on the aerospace industry, which is very cyclical depending on airplane delivery schedules. Long-term forecasts are very positive, though. The 2011 Boeing Market Outlook estimates the airline fleet will double by 2030, a delivery of 33,500 new airplanes over the next 20 years. Commercial aerospace shipments accounted for 65% of Titanium Metals’ 2011 milled product shipments, compared to 43% of shipments for the titanium industry as a whole. This is good news assuming airplane delivery forecasts play out. But the company is making efforts to expand into industrial markets, which accounted for nearly 50% of titanium industry shipments in 2011, but only 24% for Titanium Metals.
Recovering from the Financial Crisis
Demand for titanium plummeted during the financial crisis but quickly recovered by 2011.
Revenues and margins suffered as a result, and while the company has rebounded, there is still progress to be made across the board with margins.
Inventory levels have been increasing steadily since 2009, a possible cause for concern because average days of sales inventory (a measure of a company’s ability to turn inventory into sales) has increased 21% in one year. I’m not too concerned, though, because the company is responding to increased demand. Over that same period backlog has increased 34% to nearly $800 million. An analysis of the components of inventory backs this up as raw materials and work-in-progress inventory are making up a higher percentage of total inventory.
The two other major players in titanium products are Allegheny Technologies (NYSE: ATI) and RTI International Metals (NYSE: RTI). RTI is a small cap pure-play titanium producer with a similar proportion of titanium market exposure to Titanium Metals. Allegheny is a diversified specialty metal producer, whose titanium products account for only 14% of total 2011 sales. Below is a snapshot comparing the companies on a few metrics.
Titanium Metals compares favorably with the competition. The remaining question has to do with management and ownership. Control is effectively in the hands of the chairman, who has 53% ownership, while the CEO owns zero shares. The whole situation slightly smells of nepotism/crony-ism from the outside: the board includes the chairman's brother and several executives from his other companies. While past performance is no guarantee of future results, management and the board have so far given me no reason to question their ethics. I can also be assured the chairman is very invested in the success of the company with so much skin in the game.
Things are looking up for the titanium industry as a whole. There will be plenty of business to go around in the coming years in the aerospace industry, and emerging industrial applications should expose companies like Titanium Metals to more diversified sources of revenue. To sweeten the pot for investors while they wait for the thesis to play out, the company reinstated its dividend in 2011 and currently yields 2.7%. There's a lot to like here, and I am adding this company to my short list of possible buys once a little capital frees up.
drfrank1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Titanium Metals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.