Company Description:

1
Titanium Metals Corporation Basic Materials
Buy
Company Overview

• Company Description
• Titanium Metals Corporation (TIMET) is a
  producer of titanium melted and mill products.
  The Company has titanium production facilities in
  both the United States and Europe. It is a
  vertically integrated titanium manufacturer whose
  products include titanium sponge, the basic form
  of titanium metal used in titanium products
  melted products mill products that are forged
  and rolled from ingot or slab.

Recent News
-Next Earnings Announcement 11/5/2007 Stock
price has fallen recently due to weak earnings at
competitor Allegheny, and delays at Boeing on
787 -Bank of America analyst says that 787 delay
should not affect titanium demand -Announced 10
year contract with UTC worth 700 million
(9/12/2007) -Recent insider buying -Recent
earnings release (Aug 07) in-line with analyst
estimates
Summary of Investment Rationale
We believe that TIE is a good buy because of
continued expected strength in the titanium
sector and price recovery in spot titanium
prices. We believe that the market is
overreacting to poor results at ATI and delays at
Boeing.
2
Titanium Metals Corporation
October 15, 2007
Valuation Analysis
-Though P/E and P/Book are relatively high, they
are not out of line with the industry. The most
reasonable comparisons are with fellow titanium
producers ATI and RTI. -TIE has a lower PEG
ratio than any of the other titanium
producers. -TIE has nearly same P/Book with ATI
and slightly higher than RTI, but this is
explained by the higher ROE that TIE has (36.74
vs. 19.9) -In general, the market is paying a
premium in terms of P/E for titanium, which is a
high growth sector within the basic metals
industry. However, it is reasonable especially
when compared with RTP (Rio Tinto), a slower
growing precious metals/aluminum
company. -Average analyst targets (12 mo.) 41
Growth Analysis
-Titanium is an extremely high growth sector. In
the last 10 years the metal has shifted from a
specialty metal to a more general metal used for
various applications. Due to the light weight and
strength of titanium, many expect it to replace
aluminum and steel in the near future. Already,
the new Boeing 787 and Airbus 380 incorporate
more titanium than their predecessor
planes. -Titanium demand is currently driven by
the aerospace sector, which is expected to show
continued strength as airlines upgrade to the
next generation of aircraft. -Titanium is showing
growing acceptance in the automotive, energy, and
construction sectors due to longevity. -Although
titanium prices have slipped in the past several
months, we still see positive outlook over the
next five years as demand continually increases
and supply remains tight -TIE is primarily
domestic we believe there are additional
opportunities for international growth. -Analysts
estimate 22 sales growth per year for TIE.
Mutual Investment Club of Cornell
1
3
Titanium Metals Corporation
October 15, 2007
Profitability Analysis
-TIE has superior gross, operating, and net
margins than its competitors. It also boasts
higher ROA and ROE. -We expect continued high
margins and ROE for the titanium industry and for
TIE. A 5 year target ROE of 25 is
reasonable -There has been increasing asset
turnover over the past five years (from 0.65 to
0.98) -Margins and ROE have also continued to
improve over the past five years. Despite
competitive pressures we believe TIE can sustain
a high ROE due to their leadership position in
the industry.
Solvency and Credit Analysis
-TIE has strong current and quick ratios and will
not be in any short-term liquidity problem. -TIE
has no long-term debt, which we view as a
positive sign for the credit health of the
company. This also leaves room for a potential
acquisition by a larger diversified group (e.g.
Alcoa).
Mutual Investment Club of Cornell
2
4
Titanium Metals Corporation
October 15, 2007
Valuation
Our 3-stage FCFE DCF model shows a one-year
target fair value of 43.89. Assumptions -5
years of 25 growth (analyst expectations), 7
years transition period 3 growth in perpetuity
-Cost of Equity 10.91 (using beta of 1.06)
-When we increase the COE to 12, we get a fair
value of 41.87 -We believe that the company is
significantly undervalued given current growth
assumptions. We admit that the model is highly
sensitive to growth, but we estimate 25 to be a
conservative estimate in growth over the next 5
years.
Investment rationale
We recommend a BUY for TIE at a target price of
30. We believe that the industry and the company
is poised for extraordinary growth over the next
5 years and we believe in continued strength in
the aerospace sector. We also believe that TIE is
the best way to capture this strength in the
titanium market as the most focused and most
profitable company in the industry. We believe
that the recent market price reflects an undue
correction of the companys future prospects due
to mishaps in Boeings 787 Dreamliner project,
which is a major customer for TIE, a recent
weakness in titanium prices, and a weak earnings
report from competitor ATI. However, we believe
that these factors should not influence TIEs
bottom line earnings significantly. The delay at
Boeing will not reduce the demand for these
planes, and there is already a backlog of orders
which must be fulfilled. This will therefore have
no effect on the sales for TIE. We also expect
titanium prices to recover in the long run due to
the high demand placed on it. Moreover the deal
with United Technologies brings additional signs
of continued strength of the company. Ultimately,
our recommendation stands on the relative value
of TIE versus its competitors in light of its
high ROE and expected growth, the future of
titanium, and
Mutual Investment Club of Cornell
3