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Allegheny Technologies falls after dividend cut, poor 2016 results

Visitors look at aircraft engine components produced by Allegheny Technologies (ATI) at the company's display at the Farnborough International Airshow in Farnborough, U.K.
Simon Dawson | Bloomberg | Getty Images
Visitors look at aircraft engine components produced by Allegheny Technologies (ATI) at the company's display at the Farnborough International Airshow in Farnborough, U.K.

Shares of Allegheny Technologies fell as much as 10.2 percent Friday, a day after the company announced it would suspend its quarterly dividend.

The stock later recovered its losses, but still ended the session more than 4 percent lower.

ATI said the resulting cash — about $35 million — will be used to fund the company's pension, reduce debt and improve near-term liquidity. Analysts told CNBC the company is in dire need of liquidity with its key metal markets trending downward this year and a major pension payment coming up next year.

ATI made a $115 million pension payment in July, and has a $135 million pension obligation for its first quarter of 2017.

"We expect ATI's financial performance to improve significantly in 2017 as a result of strong profitable growth in our High Performance Materials & Components segment, a return to modest profitability in our Flat Rolled Products segment, and the aggressive cost reduction actions we have taken since late last year," said Rich Harshman, the company's chairman, president and CEO.

Analyst Richard Safran of Buckingham Research Group described the stock move as a knee-jerk reaction based on suspicions that the dividend suspension could be a prelude to lowering expectations, and a worsening cash flow.

"Earlier this year ATI ran into liquidity issues and had to dip into its revolver," he said. "With excessive net debt, the company is looking to accelerate debt repayment and shore up its balance sheet."

Analyst Gautam Khanna of Cowen said he was surprised ATI didn't cut its dividend earlier. Phil Gibbs, analyst at KeyBanc Capital Markets, said a lot of "dividend dedicated" investors may be rolling out of the stock today and are looking at the cyclical nature of the stock.

He also suggested the optics may be an issue since the company first cut the dividend by about 70 percent earlier this year, and is now suspending it completely. It could be a signal to investors that something is incrementally worse after its last public remarks, he said.

Separately, Chris Olin, analyst at Rosenblatt Securities, told CNBC some of the important metal markets that are key to ATI's earnings power — stainless steel, specialty material and titanium volumes — have been trending below expectations for the past two quarters. As a result, he said, ATI's results this year have been poor, with a negative free cash flow and a weak outlook for its current quarter. The company has been restructuring operations, but the gains have not been enough to offset the weak demand and price environment, Olin added.

ATI is well-positioned in the aerospace markets, Olin added.

"They produce the key materials and forged products for the new General Electric Engines to be used on the Boeing 787 MAX," he noted. "However, the production of these next-generation aircraft has not ramped fast enough to offset the negative momentum in commodity markets."

Peer companies Arconic, Carpenter Technologies, Haynes International and Universal Stainless & Alloy Products are facing many of the same types of economic challenges, such as demand and price pressures, as well as excess inventories.

Disclosures:

Deutsche Bank and/or its affiliates own 1 percent or more of Allegheny Technologies.

KeyBanc Capital Markets expects to receive or intends to seek compensation for investment banking services from Allegheny Technologies within the next three months.