Investor's Business Daily, July 5th, 2007
Companies like U.S. Steel boomed during and after World War II. Their steel sustained the military and rebuilt continents.
Today, vastly more high-tech planes and equipment usher in a new era for Haynes International HAYN.
The company makes titanium and nickel alloys to customer's specifications, usually for use in highly corrosive or stressed environments.
"The overall demand for these materials over the next 20 years is going to dwarf what happened in the last 20 years," said Francis Petro, president and CEO of Haynes, during a call with analysts. "The demand of 2.5 billion to 3 billion new people, who ultimately all want cars, all want to fly someplace, all want a home. It's very similar to what happened after the Second World War."
High Performance
Haynes should know. World War I and World War II gave the 95-year-old company early boosts. Since then, high-performance metals have been in kitchens, jet engines and on a trip to Mars.
It produces materials for three major areas: aerospace, chemical-processing industries and land-based gas turbines.
About 73% of its revenue is from high-performance applications, Weeden & Co. analyst Kevin Starke said. These titanium alloys are sold to companies like General Electric GE, which make things like turbines from alloys.
"Strangely enough despite the high cost of natural gas, the land-based gas turbines unit has grown at a particularly high clip," he said.
In fact, that turbine sector's revenue grew 63.7% in the recent March quarter.
But that's not necessarily indicative of the future, Starke says.
"It takes turns, one thing could be driving revenue in one quarter, then one big order in any segment can really move the needle," he said. "Aerospace has been huge. In the most recent quarter, it grew 13.7%."
Both turbines and aerospace are examples of the company's high-temperature, performance alloys. They're corrosion-resistant blends are used at hazardous waste treatment, chemical and power plants.
Even with Haynes' recent successes, CEO Petro is excited about a new blend that it says could replace four or five alloys in use today.
Haynes' 282 alloy blends mostly nickel, chromium and cobalt.
"This alloy appears to be a significant improvement over existing hot section alloys and will likely develop into a high volume aerospace alloy," according to trade-magazine Pittsburgh Engineer.
It added, "Often, research and development can take several years to go from an idea to a viable product. Even though the nickel and cobalt metallurgy fields have been thoroughly researched over the last 100 years, there are still innovations to be found."
Petro has been talking up 282 for several years. But on his recent call, he said it will likely be produced on a large scale next year.
The alloy, which also has slightly more than 2% titanium, is "a unique superalloy," Lee Flower, market manager for Haynes, told a nickel industry publication in 2005. It "combines exceptional high-temperature properties with good weldability and fabricability."
Its ability to be welded and formed separates the alloy from the competition, Flower added.
Indiana-based Haynes is also expanding.
In 2006, the company started manufacturing in India and China for local customers. In just one year, these emerging markets accounted for 7% of the company's overall sales, Starke said.
Haynes is well-positioned as Asia's industrialization continues to demand more heat- and corrosion-resistant alloys, a KeyBanc company note said.
Many of its sales are locked in. Two major buyers of its metals are Boeing BA and Airbus. Starke said these partnerships indicate there's "no end in sight." Many major deals are known because flight orders are back-logged five to 10 years, he said.
KeyBanc expects the company to also benefit by up to 50 cents a share in earnings in the upcoming years because of new energy-efficient reheat furnaces that will be installed over the next 12 to 18 months.
Materials Costs
A major hurdle facing Haynes is the rising cost of raw materials.
In the last year, nickel prices more than doubled. In Q1, its price shot up 259% year over year and 54% in Q2. Those price hikes didn't slow Haynes. The company logged a 285% growth in Q1 and 73% in Q2, when it beat expectations by 32.5%, or 40 cents a share.
But nickel accounts for roughly half of its raw material costs and about one-third of product costs. Haynes avoids potential pitfalls by continually adjusting its prices. The company buys nickel forward on 90-day contracts and passes on any higher costs to consumers.
Another hurdle it faces is a labor dispute. Earlier this year, 514 United Steel Workers Union members at its Indiana plant rejected a three-year contract. However, the workers later reached a tentative agreement possibly resolving complaints over atypical work schedules.
