What happened
Shares of Allegheny Technologies (ATI -2.61%) fell 15% on Wednesday due to growing concerns about future demand for new airplanes. The COVID-19 coronavirus is creating havoc with airlines, and could cause Boeing and Airbus orders to be delayed or canceled.
So what
Allegheny, a specialty metals producer focused on aerospace and defense applications, has been under careful scrutiny for a year now due to the company's exposure to Boeing's troubled 737 MAX program. The company has managed through that downturn better than feared, but the aerospace componenst supplier faces fresh challenges ahead.
Image source: Getty Images.
Airlines have been responding to a coronavirus-fueled drop in travel demand by cutting flights and grounding planes, and some have indicated that if demand does not rebound quickly they could defer deliveries of airplanes on order. Boeing on Wednesday said Air Canada had canceled orders for 11 MAX aircraft, while other customers converted their orders to other planes. Overall, Boeing had more cancellations than orders in February.
None of that is good news for component suppliers like Allegheny. Even if travel demand does rebound, it is becoming more likely that airlines will remain conservative for some time and Boeing might never hit its goal of producing 57 737 MAX airframes per month. If Boeing doesn't get to that level, it will decrease the program's overall profitability both for Boeing and its supply chain.
Now what
Shares of Allegheny Technologies are now down 44% for the year. The stock is affordable, trading at just six times earnings and 0.3 times sales. But it is also surrounded in uncertainty.
Allegheny is a well-run company, and as a shareholder I am not selling my shares. But with markets falling, there are a lot of stocks at attractive valuations that have a lot less risk right now. It's a dangerous time to buy in.
