Specialty Metal Producers For Your Portfolio
Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Metal fabrication companies, a part of the industrial goods sector, derive their demand from other companies in the industry. Companies in the metal fabrication industry have become highly focused in the past so that they can benefit from niche markets.
I have selected three companies, Chart Industries (NASDAQ: GTLS), Carpenter Technology (NYSE: CRS) and Allegheny Technologies (NYSE: ATI), that produce several different kind of specialty metal products. Below I will analyze which one of these companies presents the best investment opportunity.
Riding the winds of change in the LNG world
Chart Industries manufactures engineered equipment that helps in the production, storage and the end-usage of industrial and hydrocarbon gasses. Chart supplies its products primarily in the United States, Germany, China and the Czech Republic. The company works through its three segments: energy and chemicals, distribution and storage, and biomedical.
The largest end-user of Chart industries is the energy industry. Chart is a technology leader that provides high-end equipment for the transport of liquefied natural gas, or LNG. The demand for natural gas as a transportation fuel is rising worldwide, which is causing an increase in demand for the LNG transport equipment. Natural gas/crude oil price spread still represents savings due to the use of LNG, and it provides many countries with the much-needed energy independence.
The distribution and storage segment of the company manufactures towable tanks and bulk, microbulk and satellite LNG storage tanks that are critical for the functionality of the LNG network. The energy and chemicals segment of the company will also benefit from this change as it can expect an increase in sales of its heat exchangers and cold boxes, as these two products are critical for the LNG networks. These two products are also demanded from the natural gas processing, industrial gas and olefin petrochemical industries.
The company’s biomedical segment is also expecting an increase in its sales because of the increase in biomedical research, led by international markets. The company’s EBITDA and net income figures have improved significantly from the year 2010, and I expect it to continue performing well.
Carpenter’s changing strategies
Carpenter is a globally diversified company that is involved in the manufacture, fabrication and distribution of specialty metals. Half of the company’s revenues are sourced from outside the USA, of which the European region represents a large chunk. The company is working on its strategy of focusing on higher-margins and specialty metals. The building of a new metal facility in Huntsville, Alabama along with the acquisition of Amega West and Latrobe are a testament to this fact.
The company’s largest customer is the aerospace and defense industry, as it accounts for 49% of the revenue of the company. The demand from this industry has increased by 20% on s year-over-year basis and 10% on the quarter-over-quarter basis. This increase in demand was majorly due to the acquisition of Latrobe as it manufactures essential landing gears.
Carpenter’s second largest customers are the companies engaged in the energy sector. Carpenter sources as much as 16% of its revenue from this sector. The revenue from this source are also increasing, as Carpenter was able to realize growth in ultra-premium materials for oil and gas completions. The acquisition of Amega West will diversify the company’s offerings related to drilling and oil extraction.
Carpenter’s trailing twelve month revenue figure are its highest in a 5-year period with its EBITDA figures also showing an uptrend in recent years.
Allegheny’s new plants
Allegheny is another globally-oriented manufacturer of specialty metals. It operates through its high performance metals segment, flat-rolled products segment and engineered products segment. Allegheny’s major revenue comes from companies in the aerospace & defense, oil & gas/chemical, electrical energy and medical industries.
Allegheny has been restructuring its business recently. As the flat-roll steel model is about to expire, the company is moving to higher margin alloy products. The company’s acquisition and investments have reduced its exposure to the cyclicality of the industry and foreign markets.
In its recent company presentation, Allegheny has stated that its projected capital expenditure for the year 2013 would be close to $550 million. Most of that capital would be spent on the company’s new hot-rolling and processing facility which will be the world’s most powerful and technologically advanced specialty metal plant of its kind. This plant will be ready for service by the end of the ear 2013 and it will be capable of rolling next generation carbon steels.
The demand for the company’s specialty alloys is also set to increase, as new aircraft require stronger and lighter metals for the development of their engines.
The company’s net income and EBITDA figures have been decreasing since 2011, but with its new focus, I expect the company will start showing some impressive results in the future.
The metal fabrication companies present interesting cases as they have evolved to focus on niche markets where they are able to generate high margins. All three companies mentioned above have robust business models, but I expect Chart Industries to show the best growth in the coming years.
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Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Chart Industries. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!