ATI is a producer of specialty materials and components for global markets. ATI manufacturesproducts for a diverse group of end markets.They include aerospace and defense, chemical processindustry, oil and gas, electric power generation and distribution, and medical devices. A diversified client base creates financial stability for ATI across business cycles. The company, however, facesintense competition, which could lead to loss of market share and put pressure on its margins.
In our opinion, Allegheny Technologies economic moat comes from intangible assets and switching costs. ATI utilizes specialized furnaces and machinery. Allegheny’s alloys are required to undergo commissioning and qualification cycles that generally take one to three years because, in many cases, the materials must be approved by not only the company’s customers, but also by the end users. ATI’s business relationships are very sticky and customers are reluctant to switch to unproven suppliers solely on a cost basis.
Allegheny Technologies reached several long-term agreements, valued at $4.0 billion, with aerospace customers during 2014 and in early 2015. ATI is close to starting up activity at a new titanium sponge facility, which will start making jet engine parts around mid-2015.
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Acquisition of Ladish
Strong R&D capability
Dependence on third parties for critical raw materials
Lag in the delivery of services
Risks associated with the commercialaerospace industry
Investments to support organic growth
Long term agreements
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