RTI International Metals (RTI, Financial) is a producer and supplier of titanium mill products, and a manufacturer of fabricated titanium and specialty metal components for the aerospace, defence, energy, medical device, and other markets globally.
In this article, I will discuss the key investment positives related to RTI Metals that makes the stock a good investment option for the long term. I believe that the stock can be a value creator and investors need to hold the stock with a time horizon of 3-5 years for strong returns.
Key Investment Positives
Strong Demand for Titanium
The global demand for titanium mill products is expected to remain strong over the next 5 years, and this will drive growth for RTI Metals. Between 2013 and 2018, the global demand for titanium mill products is expected to expand at a CAGR of 4.3% with big demand coming from the defense and commercial aircraft sectors.
Specifically, the demand from the commercial aerospace sector is expected to grow at a CAGR of 7.3% over the next five years. Strong demand from these industries will keep growth robust for RTI Metals over the next few years.
Robust Order Backlog
RTI Metals had an order backlog of $516 million as of December 2013. The company’s order backlog has increased from $341 million in December 2010 to December 2013 levels of $516 million. With a strong order backlog, RTI Metals has revenue visibility and this will keep revenue growth robust.
Between the period 2010 and 2014 (as per company’s guidance) the company’s revenue has grown at a CAGR of 19% and the company’s operating income has grown at a CAGR of 53.5%. I believe this kind of growth will continue as the market demand for titanium mill products will remain strong and RTI Metals has a healthy order backlog
Strong Customer Base
Another point that I like about RTI Metals is that the company has a very strong customer base. A good customer base is indicative of the fact that the company’s products are recognized in the markets.
As of December 2013, RTI Metals has a customer base that includes companies such as Boeing (BA, Financial) and Lockheed Martin (LMT, Financial). The company also has Airbus (AIR) and Pratt & Whitney among its list of customers.
With these customers, I must add here that the commercial jet backlog is at the highest levels at 11,292 aircraft, which means production inventory of eight years. As these aircraft are produced, the demand for titanium mill products will remain strong and RTI Metals will continue to benefit.
Growth from Subsea Spending
RTI Metals is also expected to benefit from the strong growth in the subsea spending as it is evident from the chart below.
Titanium has several advantages as compared to carbon steel and this includes factors such as greater strength, lower weight, greater flexibility and highly corrosion resistant. With these advantages, titanium is likely to be in demand for subsea capital expenditure and this is significantly positive for RTI Metals.
Strong Financial Position
RTI Metals has made capital investments of nearly $245 million in the last five years. However, the company’s investments have been associated with strong growth and RTI Metals has robust financials.
As of December 2013, the company had a total debt outstanding of $517 million, but $402 million of the debt is due for payment only in October 2019. Therefore, the company faces no immediate debt repayment pressure and the company has been generating strong cash flows to service the annual cash interest of $10 million.
Further, RTI Metals also has a cash and equivalents position of $344 million and this gives the company strong financial flexibility. Adding to the company’s financial flexibility is an undrawn credit facility of $150 million.
The company’s cash position is robust and this is important as RTI Metals has also grown through several acquisitions in the last few years. RTI Metals acquired Direct Manufacturing in 2014, Osborn Steel Extrusions in 2013 and Remmele Engineering in 2012. The cash and undrawn credit facility allows the company to scout for more acquisitions going forward.
Conclusion
RTI Metals is a long-term growth story driven by the demand for titanium for global commercial jets, defense sector, medical sector as well as the subsea growth. The company has grown at a strong pace in the last few years through organic and inorganic expansion.
With the demand for titanium expected to remain strong and with a robust order book, RTI Metals will continue to grow at a strong pace over the next few years. I am therefore bullish on the stock and I believe that the company can be a long-term value creator.
