We Will Secure Long-Term Aerospace And Defense Contracts

Key Takeaways

• Expanding long-term contracts in aerospace and defense markets is expected to drive revenue and strengthen market position.
  
• Mitigation of tariffs and trade uncertainties with flexible strategies aims to protect net margins and ensure stability.
  
• Trade uncertainties and reliance on aerospace and defense could lead to revenue volatility and margin pressure due to supply chain and pricing challenges.

Catalysts

Produces and sells specialty materials and complex components worldwide.

• The expansion of long-term contracts and increased market share in core aerospace and defense markets are expected to drive revenue growth.
  
• ATI plans to repurchase up to $250 million in shares during the second quarter, potentially increasing earnings per share (EPS) due to a reduced share count.
  
• Strong demand and contract extensions in the jet engine market and airframe business, including new major contracts, are expected to boost revenue.
  
• Mitigation strategies against tariffs and trade uncertainties, such as flexible supply chain management and contract-based passthroughs, are designed to preserve net margins.
  
• Investments in production capacity and operational efficiencies are expected to enhance earnings through improved output and reliability.

ATI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ATI's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $673.9 million (and earnings per share of $4.83) by about May 2028, up from $398.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 24.3x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

ATI Future Earnings Per Share Growth

Risks

• The ongoing trade-related uncertainties and tariffs affecting the industrial markets could have a negative impact on ATI's revenue, especially considering some industrial customers are taking a cautious approach and may reduce orders.
  
• Despite ATI's belief in strong aerospace and defense demand, there is potential risk in over-reliance on this sector, which could lead to revenue volatility if there is any downturn in these markets.
  
• Potential delays or disruptions in the global supply chain due to geopolitical tensions or trade policy changes could impact ATI's ability to manage costs effectively, thereby affecting net margins.
  
• Contractual obligations and the pressure to maintain competitive pricing with the evolving tariff environment might strain resources or require ATI to absorb some costs, potentially impacting earnings.
  
• Fluctuations in material costs that are not fully passed through or offset could put pressure on ATI's adjusted EBITDA margins and earnings per share.

Valuation

• The analysts have a consensus price target of $75.1 for ATI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $673.9 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $68.8, the analyst price target of $75.1 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.