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Tuesday, August 11, 1998
Titanium Metals
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Phone: 303-296-5600
Website: www.timet.com
Price (8/10/98): $16 11/16
HOW DID IT FIND TROUBLE?
If titanium is as strong as steel, why are the shares of Titanium Metals so weak? If titanium is so corrosive-resistant, why has the stock gone rusty? If titanium is so light, why the heavy load on recent shareholders?
Unfortunately, the selling points for the metal itself have not averted the selling points for its largest producer. While few can argue with the emergence of titanium as the metal of choice in everything from airplanes to deep sea oil drilling to oversized golf clubs, this is still a commodity -- and as such will run hot and cold, with the share price to follow. Lately it has been running as cold as the North Sea.
Apart from sector weakness, Titanium Metals has also had its share of internal problems. Production levels have been erratic, orders have been canceled, and the sales mix has not been kind, leading ultimately to fading gross margins.
BUSINESS DESCRIPTION
What does Denver-based Titanium Metals do? According to the company's website, "We convert rutile ore into sponge; melt and refine ingot and slab; manufacture mill products and castings; and distribute our products globally."
What does this mean? It means that Titanium Metals is a fully integrated titanium producer, controlling all facets of manufacturing and distributing the lightweight supermetal.
FINANCIAL FACTS Income Statement 12-month sales: $763.1 million 12-month income: $79.0 million* 12-month EPS: $2.50* Profit Margin: 10.4% Market Cap: $614.1 million (*Excluding non-recurring charges) Balance Sheet* Cash: $117.4 million Current Assets: $456.1 million Current Liabilities: $123.8 million Long-term Debt: $0.5 million (*As of March 31, 1998) Price-to-earnings: 6.7 Price-to-sales: 0.8
HOW COULD YOU HAVE SEEN IT COMING?
Beyond Wall Street's lack of interest in all types of metal producers over the past few years courtesy of dormant commodity prices, Titanium Metals has had it rough. This year the company has suffered through order cancellations from jet airplane makers -- not a good sign when the airline industry accounts for 60% of the company's titanium output. Other orders have been pushed out into future quarters. The company has a $420 million order backlog, more than it has sold over the first half of the year, with 80% of that slated for 1998 delivery. That might be a welcome sign, but just six months ago the backlog was $530 million.
Also, like so many other companies, the Denver-based metal maker also has to pony up funds to update its computer system to be Year 2000 compliant. Few investors are punishing the short-term expense hits many companies are being forced to make on the matter, but, for Titanium Metals, when it rains, it ores.
Like most commodity plays, it is hard to see the ups and downs coming. If you can, the Chicago Board Options Exchange will probably want to have a word or two with you. Monitoring the airline industry to see how the fleets are being replenished is a healthy barometer of titanium interest, but difficult to accurately gauge.
WHERE TO FROM HERE?
Last month the company announced that it was looking to earn between $2.55 to $2.67 a share for the year. That was well below the $2.90 projected at the time, but it still has the company now selling at a ridiculously low 7 times earnings for the year.
Paul Larson (TMF Parlay) wrote about Titanium Metals back in June, after the stock had cratered. He closed his Father's Day feature by noting that "it's rare when such an attractive story has such an inexpensive price tag in this market."
Indeed. The story here is titanium itself. A trip to the company's website will show how the R&D department is hard at work to find new uses for titanium. From hard drives to new medical products, the potential new uses for titanium are many. The breathtaking Guggenheim Museum freshly erected in Bilbao, Spain? Titanium. Titanium provided by Titanium Metals to be exact.
Despite this seeming popularity of titanium, some may find it troubling that sales for the company have slowed down from its rapid pace set over the past few years. Titanium Metals is on the acquisition trail, as it has been in the past, but investors may be wondering why it had to close down a casting and melting facility in California earlier this year.
However, investor's concerns may very well be short-lived because single-digit P/E ratios are hard to find, even in the unloved.
-Rick Aristotle Munarriz
(t[email protected])
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