Shares of commercial aerospace suppliers had a rare up day on Wednesday, with the sector soaring after Boeing said it intends to keep airplane production at rates higher than what the markets had feared. But the stocks gave up much of those gains on Thursday, with Allegheny Technologies (NYSE:ATI) leading the decline with a 9% drop.
Allegheny Technologies is a material sciences company focused on jet engine forgings, 3D-printed aerospace components, and other titanium and related products. The company is a valuable part of the commercial aerospace supply chain, but the prospects for that entire sector have been driven down by the COVID-19 pandemic.
Airlines are struggling due to a lack of demand, and as a result they are cutting costs, grounding planes, and deferring new-plane orders. That means less volume in new components and spare parts for suppliers, which has caused shares of Allegheny to lose about half their value year to date.
Boeing on Wednesday announced long-anticipated production-rate cuts due to the pandemic, but the company said it hopes to keep making planes at higher rates than expected. Boeing also still sees long-term demand for its 787 Dreamliner and other jets post-pandemic, good news for the supply chain.
But while Boeing's guidance was more upbeat than expected, there is still a very challenging few years ahead for commercial aerospace. Thursday's trading reflects the challenges, with investors seemingly not keen on riding out the down cycle with the suppliers.
Allegheny is a well-run company with strong products, but until the cycle turns again, there just isn't going to be a lot of demand for those products. This was already shaping up as a transition year even before the pandemic, and now the hoped-for volume surge in 2021 is far less certain than it was just a few months ago.
For those willing to ride out the cycle, Allegheny is a good long-term bet. But Thursday's trading reflects the reality that a turnaround is still well off into the future.