As Nathan Slaughter writes below, today’s Daily Alert offers an opportunity to “pick up a few more shares of a great business at an even lower price.” This stock is a good choice for patient, value-oriented investors who are convinced by the fundamental growth story Slaughter details below.
“Titanium Metals Corp. (TIE) (Timet) has lost roughly one-quarter of its market cap since last May. After a decline like that, it’s important to step back, examine the root causes, and take a fresh appraisal.
“In most cases, a selloff is triggered by deteriorating industry fundamentals or subpar operating performance. If a company isn’t living up to expectations and shows no signs of righting the ship, then it might be wise to cut your losses and look elsewhere.
“On the other hand, some pullbacks are nothing more than noise in the system, such as Greece, or plain-old market jitters rather than a reflection of anything the company is doing.
“When that’s the case, the temporary pullback might provide a way for opportunistic investors to pick up a few more shares of a great business at an even lower price.
“I think that’s the case with Timet.
“In the June 2010 newsletter, I outlined some powerful growth drivers for titanium. You’ll find the metal in everything from boat propellers to Oreo cookies (giving the creamy filling its brilliant white color), but it’s mainly used in the manufacture of aircraft components such as landing gear, wing supports and engine blades.
“At the time, there were positive signs for global military fighter jet procurements, but I was much more excited about the commercial aviation segment. Older planes were (and still are) being retired to make room for newer fuel-efficient models such as Boeing’s (BA) snazzy 787 Dreamliner. Each of these engineering marvels weighs around 440,000 pounds, and titanium accounts for 15% of the construction materials — triple the percentage used in yesterday’s planes. With the replacement cycle kicking into high gear, roughly 6,500 new jets were expected to roll off the assembly lines between 2011 and 2015.
“Since you can’t build a plane without milled titanium products, I forecasted a wave of demand to begin cresting at a record 100 million tons in 2011. As the world’s No. 1 supplier, Timet looked to be a major beneficiary.
“Given the decline in the stock, you might think that something went awry since then, or maybe the uptick in orders never materialized. But things have gone exactly according to plan. The company just released its final report card for 2011 — and the results were excellent across the board.
“Shipments of raw melted titanium (ingots, etc.) reached 6.2 million metric tons, a new company record. Milled product sales surged to 16 million tons, also a new record — and three million tons more than 2010. Those volume gains pushed revenues up a healthy 22% for the year to $1 billion. Better still, increased factory utilization helped lower per-ton manufacturing costs, so operating profits sprinted at twice that pace, jumping 44% to $175 million.
“As predicted, the aerospace sector has stepped up its titanium purchasing to build inventory in anticipation of fleet replacement and overall aircraft production. And Timet continues to win more than its fair share of these orders. In fact, the company has renewed its supply agreements with a number of big customers such as Boeing in recent months, along with engine makers Rolls Royce and Pratt & Whitney — these commitments will remain in place until at least 2017.
“The future looks even brighter. With orders coming in faster than they can be shipped out, the firm’s backlog ended 2011 about 33% higher than where it began. And management reports that order activity hasn’t just spilled over into 2012 — it has actually increased.
Action to Take
“I was thinking of selling TIE. But these robust operating results and the latest aircraft production timetables have encouraged me to do the opposite.
“Last June, I thought Timet was an attractive buy at around $18 per share. Today, the company has $190 million more in the order backlog bank than it did then, yet the shares can be had for 25% less. Keep in mind, the market felt TIE was worth $40 before the recession (and sales have since eclipsed pre-crash levels to reach new record highs).
“With carriers from South America to Asia expanding their fleets, aircraft delivered are expected to remain at record levels for the next few years. And builders typically buy their titanium up to a year in advance. With all this in mind, I plan to capitalize on this disconnect by adding another 100 shares of Titanium Metals.”
- Nathan Slaughter, Scarcity & Real Wealth, March 8, 2012