Shares of Allegheny Technologies (ATI 7.03%) rose 15.6% in May, according to data provided by S&P Global Market Intelligence, on growing investor hope that both the company and the airline industry it serves will survive the COVID-19 pandemic. It's been a tough year for Allegheny investors: shares were down about 75% year to date as of late March. But in recent months, the stock has slowly been on the upswing.
Allegheny Technologies is a specialty metals manufacturer focused on titanium and related alloys used in the aerospace, energy, chemicals, and medical markets. The company's primary focus is commercial jet engine parts, which comprise more than half of its sales.
That business has come under pressure due to the pandemic. Airlines that were looking to expand just months ago are now instead cutting flights and grounding planes. That means less demand for parts, and fewer new planes and engines expected to be sold in the years to come.
The energy business has also been under pressure due to falling crude prices, limiting capital expenditure budgets in that industry.
Given the challenges its customers face, the best Allegheny can do for now is try to weather the storm. In May, the company provided a quarterly earnings update suggesting it is doing just that. Allegheny has nearly $900 million in liquidity plus access to another $600 million if necessary, which should be enough cash to survive even the worst of a downturn. It also said it was growing its business with Airbus, which seemingly means it is elbowing in on the turf of rivals including Howmet Aerospace.
Taken all together, investors in May were given the impression things were not as bad as they could be for Allegheny. That, plus a general improvement in overall market sentiment concerning the pandemic and its aftereffects, was enough to push the shares higher for the month.
A good May has turned into a terrific first week of June for Allegheny and other aerospace companies. The company's shares are up 39% for the month through June 6, thanks to a near-euphoric rise among the airlines on data suggesting travel is coming back.
Allegheny is a solid business and I have high hopes for its long-term success. But investors need to be reminded that even if traffic is beginning to return, we are still facing a long, uphill climb for the airlines. It could be 2023 before traffic returns to pre-pandemic levels, and that's assuming there is no second wave that sends us back to square one.
Even after the rally, shares of Allegheny remain off 40% year to date. That's understandable, given the challenges the industry faces. For patient long-term holders, buying in today will likely work out fine. Just be warned this upward momentum is not going to continue indefinitely.