Shorting TIE?

I truly did not expect ATI to warn. This event caught me a little flat-footed and it happened right on top of the Boeing 787 schedule delay announced on Thursday when I was long calls for both ATI and TIE. I quickly sold this exposure for a loss and regrouped.

I originally planned to be long ATI and TIE into ATI's earnings expecting a slight run-up. I then planned to sell my positions and wait for earnings to be announced with both stocks before re-entering with a long position for the 2008 787 ramp up. When my thesis fell apart, it was time to re-think it.

I then thought that there may be an earnings play with RTI (the weak sister of TIE and ATI), but the lack of specificity in their 10-Q and the confusing details provided by management during last quarter's conference call will actually keep me from shorting that stock.

So the play is TIE. All my calculations over the last two years have me to believe that TIE will miss earnings this quarter. They typically do not announce when they plan to release earnings so I will have to guess when the announcement will occur, but the plan will probably be to buy short term November puts for the earnings announcement.

Analysts currently expect TIE to report $0.39 EPS this quarter. If you look at historical earnings data, Q3 is traditionally when staff within the company take a lot of vacation and machinery goes through overhaul, maintenance, and replacement. In addition, TIE has been selling less volume this year than last year to attempt to maintain pricing for its products.

Even if you assume that TIE's Gross Margin stays close to the record Gross Margin they achieved last quarter (I am assuming 39.2%, just slightly off from the 40% reported in Q2), I don't expect average pricing for melt or mill products to exceed the pricing they achieved in Q2. It is doubtful that prices will increase, with scrap and sponge prices decreasing, demand softening temporarily due to A380 delays, and the big ramp for the 787 not yet in play .

So that leaves volume. Will TIE produce the same volume of mill and melt product as last year? If they do, then the earnings are likely to look like this graphic below and earn $0.35.


If they produce slightly more volume (like 7% more), they will still miss the $0.39 EPS estimate by a penny. I believe that the chance that all these variables will line up well for TIE (including increased pricing in a weaker short term market) is unlikely and that is what I believe they have to do to meet or exceed the estimate.

So what to do? Well, I plan to wait. I believe that the ATI management warned and guided down to have their earnings hit the upper end of their range for the quarter (good managers would do that). Investors will be slightly grateful and the sector may pop a little after ATI earnings, helping the short. The ATI earnings announcement will also be a good time to calibrate average pricing for melt and mill product, before a put options buy is placed. Finally, the technicals will be looked at to maximize a good entry

The first rule with trading TIE is that this is a Harold Simmons company. He has a controlling stake and defends the stock price. He can make any short play very difficult whenever he wants by buying stock or by the company putting out a Press Release about something positive, so I want to stay "short" with my puts for as short a time as possible. Time decay is also a negative, so I want the puts to be in place for the event and covered immediately.

RTI declares on 10/31 and TIE usually reports around the same time. If ATI data confirms that titanium pricing is slipping, I plan to buy puts on TIE shortly after the ATI announcement and conference call and will hold them until TIE announces or the trade thesis changes.