RECOMMENDATION by The Street.com
We rate RTI INTL METALS INC (RTI) a BUY. We are positive on the expected benefit from a favorable demand
outlook for titanium, a growing order backlog, and a strong balance sheet. Also, RTI reported an impressive
earnings performance in the recently concluded quarter, leading to a good improvement in shareholder
return.
HIGHLIGHTS
Favorable demand outlook. Titanium demand continues to benefit from rising consumption among aerospace
companies such as Boeing Co. (BA) and Airbus S.A.S., which has prompted producers to add capacity.
Further, the usage of titanium in industrial applications, medical equipment, and oil and gas exploration, is
picking up. RTI is best poised to benefit from this, due to its strong market presence and growing exposure to
military and defense markets.
Margin expansion fuels earnings growth. RTI’s net income more than doubled to $22.07 million in Q1 FY07
compared to $10.74 million in Q1 FY06, primarily due to a 771 basis points improvement in its operating margin,
driven by selling price increases and a favorable mix of high margin mill products. The company’s order
backlog grew by 6.0% and stood at $606.00 million as of Q1 FY06 end. Looking forward, management expects
full FY07 revenue to grow by 20.0% to 25.0% over FY06.
Strong balance sheet. RTI is an under leveraged company with a very low total debt-to-equity ratio (0.03 as of
Q1 FY07), and a cash balance of $129.65 million. This strong cash position and its ability to leverage provides
the company the financial flexibility it needs to continue generating solid organic growth and fund future
acquisition plans, while enhancing value for its shareholders.
Superior return-on-equity (ROE). RTI’s ROE improved a robust 767 basis points to 17.75% as of Q1 FY07 end, led
by a strong growth in net income. In turn, RTI’s ROE surpassed the average of the Metals & Mining industry
and the S&P 500 at quarter’s end. Looking forward, ROE growth could continue due to anticipated net income
growth.
Risks to the BUY rating. The principal risks to the rating emanates from customer order cancellations or any
unexpected delay in fulfilling customer supply obligations. Also, any significant increase in the cost of the
company’s key input, ferro- titanium, could hurt RTI’s operating margin.
Regards,
frenchee
#board-4258 TSP Trend Timing: EFA (I), TLT (F), SPY (C), and VXF (S)
