The City of Steel at Night - Can ATI Improve from Here?

A lot has been said about the ATI earnings warning a few weeks ago (and recent earnings release), so I will try not to repeat it here, but this well run company just hit a speed bump. Their flat rolled commodity stainless segment had lower quarter over quarter sales and flat pricing. Demand is soft for this portion of their business.

Their High Performance Metals group continued to improve, but not enough to offset the weakness that ATI had elsewhere. Even within High Performance Metals, the pricing that the company was able to achieve for titanium mill products was a dismal $29.43 per pound. This is more than 7% lower than the previous quarter and says a lot about what is happening currently with titanium producers.

Demand has softened enough that prices are coming down just as sponge supply is starting to flood the market. While ATI sets up agreements to pass through most of the changes in materials costs, it's LIFO accounting helps to create a short term weak operating income environment. I expect ATI to begin to rebound in the 4th quarter and begin to take off again in early 2008 as demand for the Boeing 787 begins to hit full stride.

I was watching ATI primarily for the titanium pricing. It has set up a trade with TIE's earnings coming up. If TIE's titanium prices don't increase from Q2 , they will miss earnings estimates. If they are as bad as ATI's pricing, TIE will miss big time.

Yesterday, I bought TIE Nov35 puts and today I added more after the company's stock popped up after an announcement that they signed a new strategic agreement with CRS. A poster on the TIE InvestorVillage Message Board pointed out that another way to play this trade is through buy-writes, but I felt that this more conservative play tied up too much capital at the moment. Therefore, I bought puts and accept the risk with time decay. The trade would work better if we knew when TIE expects to announce, but they typically don't tell investors this information.

Now that TIE is a member of the S&P 500, I am concerned that they will report next week (when RTI reports), so the trade had to happen now. TIE has moved up with the S&P announcement and now the CRS deal, but I still believe that the stock will not penetrate $35.50. I am prepared to buy more puts past this resistance point using wide spacing.

The RTI earnings news (they report Tuesday) may also boast the stock (I expect them to make their estimate), so I have to expect that anything is possible with potential further pin action prior to TIE reporting. I have my seat belts fastened.