It's Time to Buy This Future High Flyer

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Few industries are growing as quickly as the global aerospace industry.  As our economies have become more interlocked the demand for new planes to carry those going to and fro has increased as well.  One highly sought after component that is making this all possible is Titanium.   

What is Titanium?

Titanium is an incredible element which combines a fantastic strength-to-weight ratio with resistance to corrosion and top notch performance under extreme temperatures.  These characteristics make it a vital resource for commercial jets as well as everyday usages ranging from golf clubs to jewelry (as evidenced by my wedding band). 

There are several companies in the industry such as RTI International (NYSE: RTI) and Allegheny Technologies (NYSE: ATI) but none are as large as Titanium Metals (UNKNOWN: TIE.DL) aka Timet.  That’s why I’m adding shares of this top notch firm to my virtual “No Drip, No Mess” Portfolio.

Why Timet?

Not only are their products versatile but they are essential to the airline industry.  Boeing (NYSE: BA) is a heavy user of Titanium, even more so with their newest Dreamliner 787 planes.  These larger aircraft require more titanium than smaller planes and given the trends in the industry toward bigger planes it’s a very big demand driver for Timet. 

According to a RTI International the titanium industry is being driven by what they call “unprecedented aerospace demand.”  They see it growing by 8.4% annually through 2016 and overall demand growing by 6.9%.  One big driver of the aerospace demand, the Boeing 787, has titanium going from 7% of materials content in the Boeing 777 to 15% of the 787. 

Timet is a large supplier to this industry because they are the world's largest titanium producer.  They are the world’s leading manufacturer of the premium quality billet and bar that’s critical for jet engine rotating applications while also being a leading supplier to the airframe structural market.  As the largest player in the fastest growing titanium market Timet is uniquely positioned to benefit from the growing use of air travel in Asia-Pacific and the Middle East. 

Financials

While both RTI and Allegheny have very good titanium businesses, I’m bypassing the home teams for Timet.  While they’ve seen earnings drop 18.5% annually over the past five years due to a slowing economy, that trend is about to change.  Earnings are poised to jump 35% next year to about $0.90 a share making their forward price to earnings ratio just 13 times.  Their balance sheet is a little light with just $12 million in cash against $94 million in debt.  Overall though their financials are solid.

The Trade:

I view Titanium Metals as more of an income position for the portfolio, at least over the short term.  In addition to the strong 2.5% dividend yield I want to use options to generate even more income.  The plan at the start includes buying 100 shares of the company at just under $12 a share and then simultaneously writing a March $12 call against those shares. Further, I’ll be writing two March $11 puts to either buy more shares cheaper or earn income while trying.  In total I’ll be allocating about 3.4% of my capital in the company.  The options pay very well and should gross about $225 for a 6.6% yield.  That’s not a bad return for about three and a half months’ worth of capital.

Risks and Why I’d Sell 

If the economy goes into a tail spin Timet could be faced with a similar situation to 2008 which really crimped earnings.  This could cause a slowdown in production of the new planes or even the cancellation of some orders.  While that risk remains real, by writing puts and generating income I’ve mitigated some of that risk.  Bottom line, I think Timet will be an excellent income producer in the short term and over time will significantly outperform the market through capital appreciation as more titanium filled planes take off. 


latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of Titanium Metals. 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.

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