To judge from the 160% increase in its stock price over the past year, you might think that all trends favor an increase in demand and price for Titanium Metals'
But it just isn't so. The new Airbus A380 super-jumbo jet uses eight times as much titanium as an ordinary Airbus jumbo jet, and orders for production of the craft are pouring in. That certainly bodes well for titanium makers such as Titanium Metals, also known as "Timet," and competitors RMI Titanium
But titanium bulls beware. Another trend is afoot that could have a significant impact on these U.S. producers of the metal, as well as a lesser effect on Russia's soon-to-be-traded VSMPA. That trend is the relentless march of defense cuts, soon coming to a titanium-consuming defense contractor near you.
The yin and yang of the commercial aircraft industry also bears consideration. Every sale of an A380 that Airbus makes is likely to be balanced out by a lost sale or two of a Boeing jumbo jet. Those Boeings that don't get built, don't use titanium. And the titanium that doesn't get used, doesn't get sold.
Does any of this mean Timet is a bad buy right now? Not necessarily. With both its trailing price-to-earnings ratio and its enterprise value-to-free cash flow ratio standing at about 15 today, against a return on equity of 21%, the company is pretty attractively priced, despite its recent run-up. Fools should bear in mind, though, that like other metals stocks, titanium companies are cyclical in nature. The cheaper they look on a P/E basis, the closer to the precipice they may actually be.
For more light-but-strong articles on the titanium industry, read:
Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.