Michael,
thanks for TIE. How high will TIE fly?
Fundamentals:
Titanium Metals (NYSE ticker TIE) is the worlds largest supplier and integrated producer of titanium metal products. In 1999 TIE accounted for 24% of worldwide industry shipments, shipping 11,400 metric tons at an average price of $33.00 per kilogram. That equates to approximately 25 million lbs.
The purchase of TIE common stock is an idea based in buying a stock when no one wants it and holding it until they do. TIE will command much higher prices when an upswing in aerospace and titanium demand becomes apparent and the current cyclical downswing in the industry turns up, which may have happened as we speak. This strategy coincides with our objective of realizing long term capital gains at greatly reduced tax rates. In every calamity there exists an opportunity for those with the foresight, patience, and courage to buy out of favor down and out stocks when they are cheap and nobody wants them. In most instances this requires stepping up to the plate while the backdrop of news is bad, and when the stock is at bargain basement levels. Such is the case with TIE.
The Company's sales in 1999 were $480 million versus $707 million in 1998 and $733 million in 1997, a peak year for titanium shipments. I believe that mid year 2000 represented the trough of the titanium cycle. Earnings have steadily declined from $2.64 per share in 1997, to $1.46 in 1998, and a loss of $1.00 per share in 1999. Analysts who cover TIE estimate the Co. will lose $1.20 in 2000, and lose $.30 in 2001. Fortunately as TIE's CEO Martin Landis stated at the last conference call, titanium demand has a way of sneaking up and when it does, demand grows fast, taking everyone by surprise. While on the surface the numbers appear bleak, research into the titanium industry and TIE in particular show that the future is anything but bleak. TIE has alot going for it in the future which can make for substantial long term capital gains.
TIE is a leaner and meaner company today than at any time in the past. They have paired down the workforce from a 1997 peak of 3,025 to a headcount of 2,300 today. This reduction was necessary due to the the general decrease in aerospace and aircraft demand experienced throughout the industry over the last several years. While downsizing the headcount, TIE implemented a major strategic expansion of its facilities and equipment. TIE spent over $100 million to increase capacity at the request of Boeing who wanted to insure adequate supplies of the metal were available to meet forecasted production needs. Boeing blew it, and they forecasted wrong. They also failed to integrate McDonnel Douglas as quickly as they thought causing huge production problems. Boeing looks like they are getting their act together now however. Back in the peak demand years Boeing and TIE entered into a long term supply contract. TIE increased capacity, but orders from Boeing failed to materialize. TIE now has 48,000 metric tons or 26% of the world's melting capacity. They also have 20,000 metric tons of mill product capacity which represents roughly 16% of total world mill product capacity. The Co. is no small player in the titanium game. Unfortunately TIE's expansion was accompanied by a period of decreased aircraft production from 1997 through 2000. TIE now operates at only 50% of its capacity, thus is unprofitable. The cost to TIE of all this unabsorbed overhead, coupled with restructuring charges and layoff demands on severance pay have hurt TIE badly. TIE sued Boeing in 1999 for $640 million related to the breach of contract regarding TIE's expansion and Boeing's failure to take minimum contractually specified amounts of titanium product. After reading both TIE's complaint and Boeing's response, it becomes painfully obvious that TIE has a very good case. My guess is that it will be settled out of court sometime before the February 2002 trial date. BA can not afford a trial they will clearly lose. TIE will get a chunk of money and probably commitments for purchase of product. A $640 million settlement is worth $20 per share to TIE holders, though I doubt it will ever get to court. They are talking now, but an outcome whatever it is will be favorable to TIE. Boeing recently settled smaller breach of contract suits with other suppliers such as RTI , another titanium producer. RTI got pretty much what they asked for in the suit roughly $16 million. In the meantime Boeing's commercial and military aircraft backlog continues to grow. BA can not afford to alienate TIE during a period of increasing aircraft demand. You know what they say, "What goes around comes around."
There are only 2 other fully integrated producers of titanium in the US. Allegheny Teledyne (now Allegheny Technologies, NYSE ticker ATI) and RTI International ( NYSE ticker RTI). Allegheny is clearly the larger of those 2. With its March 1998 takeover of Oregon Metallurgical and its purchase of the assets of Ludlam from Bethlehem Steel last year, it has quite an operation. It's Allvac, TI Industries, and Wah Chang units all produce varying amounts of titanium product. However titanium is only a part of ATI, so it is not a pure play on titanium. RTI was the titanium arm of US Steel ( now USX) and was spun off from USX in 1990. It trades under symbol RTI on the NYSE, but RTI has some very daunting environmental litigation pending. It is too risky and in fact USX spun it off thereby avoiding future liability. What remains is the fact that TIE is the only pure titanium play left. Boeing did navigate some strategic supply agreements with Verkhnaya Salda Metallurgical Production Association (VSMPO) , of Russia. The potential 5 year deal struck was worth only $75 million and has potential to $175 million, hardly enough to build Boeing's back ordered aircraft. Additionally, Russia's unstable economy is riddled with crime, bribery, kickbacks, and all sorts of problems. Doing business with Russia is kinda like shooting craps with a Mafia hit man. So Boeing must have a reliable US supplier base it can depend on.
In year 2000 alone Boeing has received orders for 529 commercial aircraft, well ahead of last years forecasted order rate for year 2000. That number grows as I write this article. In 1999 the school of thought by the forecasting geniuses was that BA would receive orders for 470 aircraft in year 2000. that has been exceeded. What is most promising is the fact that Boeing's 777 model is really picking up steam. British Airways continues to build its fleet of the 777 and now has 40 with 5 more on order. Backlog on the 777 is 115 aircraft with AlItalia, American Airlines, Singapore Airlines, GE Capital, International Finance and leasing Corp., Continental Airlines, Japan Airlines, and Nippon all in the customer mix. Typical demands on titanium supply begin about a year before scheduled deliveries of aircraft. The 777 is the world's largest user of titanium with a flyweight of finished titanium parts equal to about 1/2 million pounds. The purchase requirements are much higher, given the complexity of the structural shapes and finish machined components. While the exact purchase requirements of sheet, billet, ingot, etc. are unknown, the B2 Bomber had a purchase requirement of 7 times the flyweight. Then you have the A300 Airbus coming online about 5 years from now the way it looks. That plane could really deplete titanium supply and resources causing a panic scarcity.
In addition to commercial aircraft, the future looks bright on the military side as well. Stepped up defense spending is being directed primarily to purchase hardware, while DOD is cutting overhead like salaries and facilities. Take for example the the Airborne Laser Program Office down at Kirtland AFB in New Mexico. They have designated titanium the material of choice for the largest aircraft belly skins ever produced. The 25 x 5 1/2 foot skins ( 2 per plane) will provide the armor's reflective capability to repel fire and protect contents. Of course it is DOD who originally designated titanium a strategic commodity vital to the national security.
There are other promising uses for titanium as well in the medical and orthopedic markets, space travel, energy, and automotive uses. This past year TIE struck a deal with Corvette to supply a new titanium muffler system for the legendary sports vehicle.
Titanium goes into virtually every aircraft produced. It's in the pipes, the skins, the hydraulic landing gears, the ducts, the heat exchangers, you name it. It's high strength, corrosion resistance, light weight, and thermal properties make it the ideal material for demanding applications. the US has the lead in only 2 basic manufacturing industries. One is aircraft and the other is technology. Going forward we must maintain that leadership and productive capability or we lose like we lost to Toyota in the 80's. TIE is well positioned to capitalize on increased aircraft production coming on line now. Military use of titanium will grow as well. Lets face it, people want to fly and they will be flying long after the boob tube is an obsolete relic.
Industry experts say the amount of titanium product in the pipeline is is wearing down and inventories of existing product are being depleted. I spoke with one major California supplier of titanium who told me that things are picking up and that order rates are improving a bit now. Their experience says the worst is over and they anticipate a gradual upswing in demand. TIE has recently raised prices on certain aircraft grades, something that could never be done a year back.
Institutional holdings of TIE represent about 11 million shares as of the last reporting period. Several institutions took initial positions recently. Royce Associates took a position of 664,000 shares. TIE also has a strategic agreement with Rolls Royce who uses titanium in engines they produce. First Union bought 162,000 shares and Caxton Associates took an initial position of 200,000 shares. There are a few others as well who either established initial positions or increased previous holdings. While a few institutions did sell or reduce holdings, overall in net terms more than a million shares were bought than sold by institutions in the 3rd quarter of 2000 and the number of institutions holding TIE stock was reduced by 8. This is a positive development as more weak holders are eliminated and more and more shares find their way into fewer and fewer strong hands. TIE has approximately 32 million shares outstanding. Institutions owned 30.5% or 9,706,839 shares representing an increase of 12.35% during Q3, 2000. 24 institutional sales of 739,354 shares was dwarfed by 16 institutional purchases of 1,806,103 shares in the 3rd qtr. of 2000. The net affect is that 1,066,749 more shares are owned by 8 less stockholders. The transition of shares from weak holders to strong hands is telling. Particularly when such a transition takes place against a backdrop af large quarterly losses.
Insiders began purchasing TIE stock again in mid 2000 as well. The CEO and others shelled out for 70,000 shares in May of 2000 coming after Tremont increased its stake in January. Management and insiders now own about 1.2 % of the stock. They bought of course while the news was bad and just as TIE eliminated the dividend. Tremont Corp. (NYSE ticker TRE) owns 12.3 million shares of TIE or 40%. This strange corporate concoction of Wall St. Financier Harold Simmons has accumulated stock in TIE at prices ranging from $27 to $4 1/4 over the past 4 years. The most recent purchase was 2 million shares on Jan. 3rd 2000. One has to wonder about Simmons and his maze of corporate holdings. He is the major shareholder and controlling interest behind NL Industries (NYSE ticker NL) which is a major user of titanium pigments and powder forms. He is an indirect controlling interest in TIE as well through his ownership of Valhi Corp., Tremont Corp., and NL, which all own stock in each other and TIE in one way or another. It's a real mish mash, but the fact remains they are holding 40% of TIE.
Given the possibilities here, from BA's lawsuit to higher aircraft production rates, from increased institutional interest to insider buying, the situation warrants making TIE an all time favorite for large capital gains. My projected target of $30-$40 in 2-3 years represents a 300-400% gain from today's prices. Its worth putting this one away for a while.
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