Superman may have been strong enough to bend steel, but it takes a monster to crush titanium. Such a monster has reared its fearsome head, and its name is global recession.
For titanium manufacturers like RTI International Metals (NYSE: RTI ) , though, business was already melting before the aptly named Fall of 2008. Last July, I reported an earnings miss sparked by delays in Boeing's (NYSE: BA ) 787 Dreamliner program and softness in product pricing. Fast-forward to 2009, and we find RTI International Metals actually beating estimates despite an 84% reduction in net earnings over the prior year.
Boeing continues to injure the company with these Dreamliner delays, making it difficult to maintain efficient operations at two of RTI International Metals' fabrication facilities. Meanwhile, RTI International Metals has not been immune to the sharp drop in base metal prices that has blasted miners like Rio Tinto (NYSE: RTP ) . Cheaper nickel, used extensively in titanium alloys, contributed to nearly a 20% drop in realized prices for the company's titanium unit. Total shipments for that unit also declined by 25% to 3 million pounds.
The recession monster has not spared RTI International Metals' competitors. Allegheny Technologies (NYSE: ATI ) reported roughly a 25% decline in fourth-quarter earnings, while an analyst warned of blemishes on the company's balance sheet. That same analyst has lowered earnings expectations for Titanium Metals (NYSE: TIE ) , forecasting weak demand through 2010 mounting pressures to cut capacity. We've already seen deep production cuts within related metal products sectors. U.S. Steel (NYSE: X ) is operating below 45% of capacity, while Century Aluminum (Nasdaq: CENX ) recently added enormous share dilution to a spate of mill closures. Given the challenges, I can't see how titanium producers can avoid further production cuts of their own.
What's the titanium lining?
While acknowledging significant challenges, RTI International Metals CEO Dawne Hickton expects to sell 10 million-12 million pounds of titanium products in 2009 while maintaining positive net earnings for the full year. Furthermore, the company's balance sheet does appear solid, with more cash than debt, an undrawn credit facility of $200 million, and only $1.4 million in debt payments coming due in 2009. With those considerations in mind, and following the more than 75% collapse in shares from the 52-week high, RTI International Metals is worth keeping an eye on from a value-investing perspective.