Sector Watch: Clad metal producers
With a high strength-to-weight ratio, titanium may be the element investors need to up the robustness of their holdings.
Rising demand has caused titanium prices to more than double over the past three years and shares of titanium producers have flourished, especially in the case of Dynamic Materials Corporation (Nasdaq:BOOM) and Brush Engineered Materials Inc. (NYSE:BW). These companies meld titanium with less expensive metals to create so-called clad metals offering titanium’s strength and corrosion-resistance at a more affordable price.
Once thought exotic, titanium is now frequently sought by engineers in the energy, chemical, industrial and electronics industries because stricter emissions standards have forced industry players to raise processing temperatures and use corrosion-resistant metals in equipment designs. In addition to being corrosion-resistant, titanium is as strong as steel, about 45% lighter and offers superior thermal and conductive qualities. Clad metals also allow manufacturers to maintain delivery schedules when titanium is in short supply since less prime metal is used.
Dynamic Materials is the world’s leading provider of explosion-clad metal plating. This process uses an explosive charge to bond metals that can not be joined by welding. Clad metal plates consist of a thin layer of corrosion-resistant metal (such as titanium) bonded with a thicker, less expensive base metal such as carbon steel. Rising capital investment and equipment demand in the energy, refining, mineral processing and petrochemicals sectors helped to push worldwide clad metal sales to approximately $1.4 billion in 2007.
Dynamic Materials businesses include: Explosive Metalworking, which uses proprietary explosive processes to fuse different metals and alloys; Oilfield Products, which manufactures and sells oilfield perforating equipment; and AMK Welding, which welds components for power turbines and jet engines. The company’s largest segment, Explosive Metalworking, accounted for 94% of 2007 revenues. The company’s customers include market leaders in the energy, chemical, mineral and construction segments such as Enron Corp. (OTC:ECSPQ), BP (NYSE:BP), The Dow Chemical Company (NYSE:DOW), Rohm Haas Company (NYSE:ROH), Barrick Gold Corp. (TSE:ABX), GRD Limited (ASX:GRD), Fluor Corporation (NYSE:FLR) and Bechtel.
Demand for clad metals is particularly strong in emerging markets such as India, China, Russia and the Middle East. Dynamic Materials recently expanded its European presence by acquiring Germany-based DYNAenergetics. This acquisition also gives the company additional explosion-welding capacity and significant new oil and gas industry customers.
Dynamic Materials sales rose 46% in 2007 to $165.2 million from $113.5 million the previous year, while operating income climbed 29% year-over-year to $38.9 million from $30.1 million. Net income from continuing operations jumped 27% year-over-year to $24.6 million, or $2 per share in 2007, from $19.3 million, or $1.58 per share, in 2006. Order backlog for the Explosive Metalworking segment exceeded $100 million at year-end 2007. Dynamic Materials managers target 60% revenue growth in 2008. Analysts believe this company will generate 20% earnings growth this year and 23% growth next year. My $60 price target for Dynamic Materials is about 38% above Tuesday’s closing price of $43.54. Shares have ranged between $32.25 and $66.30 over the last 52 weeks.
Brush Engineered Materials also produces high-performance engineered materials and is the world’s only fully-integrated producer of beryllium and beryllium composites. Beryllium is a corrosion-resistant metal similar to titanium and characterized by high electrical and thermal conductivity.
Brush produces specialty engineered beryllium alloys for the computer, telecom, automotive electronics, aerospace and fiber optic cable industries; beryllium products for defense, aerospace, x-ray and acoustic applications; engineered materials systems for telecom, automotive and computer applications and advanced materials for the microelectronics, semiconductor, optical media, aerospace and performance film industries. The company’s largest business segment, Advanced Material Technologies, produces specialty metals for data storage, medical, wireless, semiconductor and microelectronics applications and contributed 54% of 2007 sales. The second-largest business, Specialty Engineered Alloys, manufactures beryllium-containing materials and accounted for 30% of 2007 sales.
In the fourth quarter of 2007 ended Dec. 31, Brush marked its 20th consecutive quarter of year-over-year sales growth and its ninth consecutive quarter of double-digit sales growth. A key driver in 2007 growth came from the company’s new line of disk drive materials which are rapidly garnering share in the data storage market. Brush also capitalized on higher growth rates in international markets by expanding its presence in China, Japan, Korea and Singapore. In 2007 Brush’s sales grew 25% to a record $951.1 million from $763.1 million in 2006. Excluding one-time items, per-share earnings rose 30% year-over-year to $1.79 in 2007 from $1.38 last year. Reported per-share earnings were $2.59 in 2007, up 6% from $2.45 in the prior year.
Brush recently completed the acquisition of Techni-Met Inc, a manufacturer of precious metal-coated thin films. The Techni-Met purchase enhances Brush’s presence in the thin film market and enables the company to pursue new growth opportunities in medical diagnostics.
Brush shares have traded near $62 in the past 12 months but the share price dropped significantly in early February when the company announced slower-than-expected demand in the cell phone handset and magnetic media markets. Despite weakness in these two areas, the company still expects 10%-plus revenue growth and 30% per-share earnings growth in 2008. My $48 price target for Brush is 66% above the company’s $28.89 stock price on Tuesday. Over the last 52 weeks, shares have traded between $23.77 and $61.82.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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