Market Overview
Following another week of hotter-than-expected inflation data and hawkish Fed speak, the leading indexes had their worst week of 2023. The S&P 500 fell 2.75%, the Dow lost 3%, and the Nasdaq declined by another 3.3%.
In an effort to keep the portfolio as diversified as possible, this week’s pick is a recent earnings winner whose products are used in the aerospace field.
The Stock – Allegheny Technologies (ATI)
Why the Strength
A pandemic-induced slump in business and vacation travel has given way to a boom in new orders for commercial jets as flight demand returns. That’s resulted in a big pickup in orders for ATI, which produces titanium- and nickel-based alloys, stainless steel and specialty components for the global aerospace and defense markets (53% of sales).
In its recent Q4 earnings report, the company called the order boom “the most robust aerospace ramp in decades” and said it’s running the business to take full advantage of the opportunities it presents. Total Q4 revenue came in north of $1 billion for the second straight quarter and was 32% higher from a year ago, led by commercial aerospace product sales that soared by over 85%. Per-share earnings of 53 cents beat estimates by a penny while adjusted EBITDA increased almost 50% for Q4 and 90% for the full year. Significantly, ATI generated $148 million in free cash flow for 2022, which exceeded the firm’s guidance by over 60% and compared to the year-ago breakeven-ish figure.
The company’s jet engine sales in 2022 doubled from the prior year, which ATI called “astounding,” and 2022 airframe sales grew 79%. Another indication of the jet market’s strength was the firm’s revelation that in Q4, customers made advanced payments to lock in their 2023 production slots due to strong titanium and nickel demand (key metals used in airplane engines and airframes). Management said the commercial airplane market is at a “critical positive inflection point” and believes it will lead to further growth due in part to massive recent orders for major jet manufacturers like Boeing, while the war in Ukraine is accelerating demand for defense materials. Looking ahead, ATI sees steady 10%-ish revenue growth and a near-doubling of EBITDA margins through 2025.
Technical Analysis
ATI actually showed very solid strength last year, with a huge rally to new highs in April, and after a summer dip to the 40-week line, another push to minor new highs in August. Then came a flat, tightening period for a few months, with ATI breaking out in early January and racing to 41 following earnings earlier this month. We like the three-week rest period as the 25-day line catches up. Stop – 34
The Covered Call Trade
Buy Allegheny Technologies (ATI) Stock at 40.75, Sell to Open April 40 Strike Calls (exp. 4/21/2023) for $2.50, or a Net Price of 38.25 or less
Static Return: $175 per covered call (4.57%)
Breakeven: 38.25
Covered Call Return (if assigned): $175 per covered call (4.57%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 38.25 or less. (In this case 40.75 minus 2.50 = 38.25. Or another example is you could pay 41 for the stock and sell the call for 2.75, which also equals 38.25)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on March 7, 2023.
