It's an exciting time for titanium stocks. Emerging trends such as metal 3D printing and aircraft fuel efficiency are driving the widespread implementation and adoption of the strong yet lightweight metal and its alloys. Meanwhile, prices are recovering strongly for nano titanium dioxide powders -- the most used form of titanium globally -- which were stuck in a multiyear rut after a flood of capacity came online in 2014.
Put it all together, and investors intrigued by the potential opportunity may want to give Venator Materials (VNTR -36.21%), Kronos Worldwide (KRO -0.44%), and Allegheny Technologies Inc. (ATI 0.73%) a closer look. They're among the hottest titanium stocks to buy in August.
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The newest titanium stock
It wasn't exactly the most anticipated IPO in recent years, but Venator Materials is starting life as a public company with a formidable business in place. That's because the pure-play titanium stock was formerly the titanium dioxide and pigments division of Huntsman Corporation (HUN 0.21%).
So what do investors get? Venator Materials starts off with annual titanium dioxide manufacturing capacity of 785,000 metric tons, making it one of the top producers in the world. In 2016 the business reported $2.3 billion in revenue, which was about one-quarter of total sales at Huntsman Corporation.
The timing of the IPO is a bit unfortunate for Huntsman Corporation, as titanium dioxide selling prices are just beginning to recover, but it needed to clean up its balance sheet ahead of its pending merger with Clariant. Proceeds from the Venator Materials IPO and subsequent debt distribution will allow the former parent to pay down $1.2 billion in total debt.
HUN Total Return Price data by YCharts.
That means all the potential spoils of the industry's recovery will go to Venator Materials. While pro forma financial reports show that the business lost money in recent years, investors should expect a much healthier performance as a stand-alone company.
Indeed, cost of product revenue and administrative costs declined 12% and 23%, respectively, in the first quarter of 2017 compared to the year-ago period -- just as the company was preparing for its spinoff. If not for a $59 million charge related to a fire at one of its production facilities, then the company would have turned in a healthy profit. This titanium stock is one to watch in the quarters ahead.
Did you say price recovery?
Kronos Worldwide is a great example of what a highly optimized titanium dioxide producer can do when selling prices are favorable. The company has run laps around the S&P 500 in the last year thanks entirely to the recovery in selling prices for its products.
KRO Total Return Price data by YCharts.
All investors need to do is take a look at its performance from the first half of 2017 compared to the year-ago period:
|
Metric |
First Half 2017 |
First Half 2016 |
Change |
|---|---|---|---|
|
Revenue |
$811.2 million |
$674.5 million |
20% |
|
Gross profit |
$233.2 million |
$95.9 million |
143% |
|
Operating income |
$122.4 million |
$10.2 million |
1,200% |
|
Net income |
$233.3 million |
($2.1 million) |
N/A |
|
EPS |
$2.01 |
($0.02) |
N/A |
Data source: Kronos Worldwide.
The company took a $131 million income tax benefit in the the second quarter of 2017 to boost its net income and EPS considerably. Even still, healthy selling prices and low-cost production resulted in a first-half operating margin of 15%. Not bad considering titanium dioxide is a commodity product, although the world's top producers -- Chemours Company, Venator Materials, and Kronos Worldwide among them -- capture the bulk of the profits thanks to their size.
Metal 3D printing market takes shape
When most investors think of titanium, they're likely thinking of the products manufactured by Allegheny Technologies. Sheets, car panels, airframes, and the like. While there's a sizable and growing opportunity for the high-strength, low-weight metal in aerospace applications, investors will need to change their perspective yet again.
Allegheny Technologies is a leading developer of titanium alloy powders for metal 3D printing applications. Although the market is still in its infancy, companies such as General Electric and the start-up Desktop Metal promise to make it an enormous opportunity.
It should be no surprise then that in early July Allegheny Technologies and GE Aviation announced the formation of a meltless titanium joint venture specifically aimed at additive manufacturing applications. Investors are hoping the titanium stock's choppy performance can be steadied by the news.
ATI Total Return Price data by YCharts.
The pairing makes a ton of sense. General Electric acquired Arcam in 2016, which produced 70% of the world's metal powders for 3D printing. But at just 750 metric tons per year, it wasn't that much volume. Allegheny Technologies brings decades of leadership in materials engineering, production, and quality to the JV. Combining the two to substantially increase the volume of metal powders produced globally -- just as the market starts to take off.
Investor takeaway
All three of these titanium stocks are riding high on momentum from recent developments, but long-term opportunities on the horizon could make all of them attractive stocks to buy in August. From a major price recovery in titanium dioxide to the much anticipated arrival of metal 3D printing, there's a lot more than hype driving these stocks higher. Curious investors may want to take a closer look.
