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Early Opportunities
Get in Before the Crowd

October 25, 2023

One Good, One Bad, One New

Microsoft (MSFT) reported yesterday afternoon and crushed it (again) in the last quarter as Azure growth reaccelerated and margins expanded, largely thanks to AI-based solutions. Revenue in the first quarter of fiscal 2024 grew 12.8% to $56.5 million (beating by 3.7%) while EPS of $2.99 grew 27.2% and beat by $0.34. Shares are up today, as they should be, even in a down market. Keeping at buy, though given the action out there no rush to load up today. We’re up about 27%. BUY

Avantor (AVTR) is not crushing it. We took a swing with a half-sized position last week and this week two large companies with bioprocessing exposure, Danaher (DHR) and Thermo-Fischer (TMO), have reported. Both of those stocks are down significantly (more than AVTR), even though their results were more-or-less in line or better than conservative expectations (DHR revenue beat by 4.2% while EPS beat by 11.8%, TMO revenue missed by 0.2% while EPS beat by 1.4%). The primary issue with those stocks is that the expected recovery keeps being pushed out. While there appear to be really great buying opportunities in the space (which is why we jumped on AVTR) the broad market isn’t rewarding risk-taking. In terms of how this translates to AVTR, the bottom line is the bar is now set higher for earnings (due on Friday) and unless management can deliver something quite positive the stock could suffer the same fate as DHR and TMO. I was expecting some positive signals to come out of DHR and TMO that would increase our confidence in AVTR leading into earnings. As I stated in my writeup, “...the bioprocessing market has potential to bottom out in Q4 (i.e., the current quarter) and begin to recover next year, with the second half being much stronger. Any indications from industry participants (DHR, TMO, RGEN, AVTR, etc.) could light a fire under the group when they begin to report earnings next week.” With no tinder catching fire, we’re out. We’ll sell our half position at a small loss and move on. SELL

ATI (ATI), a materials science specialist, was added to our Watch List in September and looks to have a tradeable setup. The stock has pulled back from a September high of 46.43 to 35 (the Monday low) and has traded higher for the last two days (about even today). The May low was 34.1, meaning we’re near an obvious support level. The company recently completed a deal with Athene Annuity to reduce its defined-benefit pension obligation by 85% (not a surprise, this was in the works since summer) and has recently been flagged by Keybanc and JP Morgan as a “buy,” largely due to the growth in the company’s High-Performance Materials and Components (HPMC) segment (83% of sales). Within that segment demand for materials for jet engines, naval fleets and vehicle armor are strong. I like the setup and am sliding ATI into our portfolio with a buy rating today. My write-up from September is below for reference. NOTE: if this stock falls below support at 34.1 we will be gone. BUY

ATI (ATI) is a Dallas, TX-based materials science specialist. The company produces high-performance materials and components for the global aerospace and defense, medical, and energy markets.

ATI has been around since the mid-90s and counts almost all the big boys as customers, including Boeing (BA), General Electric (GE), Airbus (EADSY), and Rolls-Royce (RYCEY).

It is enjoying growth tailwinds these days as customers shift business to Western suppliers in order to reduce reliance on Russian-supplied titanium. ATI is also transitioning away from low/no-margin lines of business, which is helping profitability.

Currently, growth is being driven by aerospace (jet engine shipments) and defense (naval fleets, vehicle armor, military jet engines), which grew to make up 58% of total revenue in Q2 2023.

These two markets also make up 83% of sales in the company’s High-Performance Materials and Components (HPMC) segment, which is not only bigger but more profitable than the Advanced Alloys & Solutions (AA&S) segment, which has a much greater mix of cyclical business, such as electronics and energy.

Those cyclical areas of ATI have been a modest drag on growth lately (down 27% and 10%, respectively, in Q2) but are relatively small revenue contributors.

Stepping back, Q2 revenue was up 9% to $1.05 billion while EPS grew 9.3% to $0.59. Looking out to full-year consensus estimates, ATI should grow revenue by 10.4% to $4.23 billion and EPS by just over 13%, to $2.25.

Revenue growth may decelerate a little next year (+6% expected) but earnings are seen jumping nearly 30%.

If you’re interested in a growing and profitable industrial company that’s making major inroads into aerospace and defense markets due to the shakeup following the Ukraine invasion, ATI should fit the bill.

This is what the chart looks like:


Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.