Aluminum company Alcoa (NYSE:AA) reported some solid numbers for the recent quarter, which was better than the Street's expectations. In fact, analysts were expecting the same from the world's third-largest aluminum producer. Alcoa’s stock was already bullish even before the report was out, and after posting some good numbers, its stock is expected to soar even higher.
Analysis of the quarter
Alcoa reported revenue of $5.5 billion for the first quarter, which was marginally above the consensus estimate of $5.4 billion. On a non-GAAP basis, its net income was $98 million, which was again more than what analysts had expected. Going forward, the company is well positioned for growth and management has various strategies under its sleeve that will boost its numbers further.
Alcoa has plans to invest in its value-add packaging facility in Brazil. In addition to this, it will also expand its proprietary wheel facility in Hungary, which will cater to its European customers. As a part of its strategy, the company would restructure its smelting facility. Consequently, it would shut down around 420,000 tons of smelting capacity in Australia, the U.S., and Brazil. Also, the company has plans to close its rolling mills in Australia to reduce its sheet rolling capacity by 200,000 tons.
- Warning! GuruFocus has detected 3 Warning Signs with AA. Click here to check it out.
- AA 15-Year Financial Data
- The intrinsic value of AA
- Peter Lynch Chart of AA
Aluminum being a versatile metal, it finds uses in various industries. One of them is the aircraft industry. Alcoa expects the large commercial aircraft segment to deliver a strong performance, with an increase of around 12.1% this year. As a result of this, the company has raised its growth forecast by 1 percentage point and anticipates an overall growth of 8% to 9% this year.
The aerospace segment comprises of three major components. First is the advanced aerospace structure, which is made of aluminum, titanium forging, and structural casting. The composition of each metal is in different proportion, with 50% titanium, 30% aluminum, and 20% nickel alloys. The second component comprises of the engine and Alcoa is a global leader in the jet engine air force business. The third and the last component comprises of innovative fastening systems, where it is again a global leader. This clearly reflects a diversified portfolio, which gives the company immense growth opportunities in this industry.
According to a report by Airline Monitor, aircraft prices would increase with average prices expected to be up 2.1% for Boeing and 5.7% for Airbus. Also, IATA anticipates that passenger demand would increase by 5.8% and cargo demand is expected to increase 4%. Moreover, smaller segments in aerospace and jet have rebounded 13.2%, and Alcoa has a backlog of around five years for more than 1,200 aircrafts.
In the automobile industry, Alcoa has a strong presence and sees better prospects in the future. According to statistics, automotive growth in the U.S is expected to be in the range of 2% to 5% for this year. Production has also improved and is up to 1.39 million units in February, which is a 4% increase on a year over year basis.
On a global basis, Europe is expected to perform better from its previous prediction of minus 1% to plus 3%, and could be seen in the range of 0% to 4%. This was mainly on account of an increase in the registrations by 6.6% this year. In addition, China’s automotive market is expected to grow in the range of 6% to 10% for this year.
Similarly, the heavy trucks and trailer market in North America is also expected to see solid demand. Truck orders for the first quarter increased 35.2% to 90,100 units as compared to last year. Apart from the automotive market, North America is also expected to see growth in the building and construction industry. The growth numbers are anticipated to be in the range of 3% to 4%. All these growth numbers point to immense growth opportunities for Alcoa in the days ahead.
Positive industry prospects
The prices of aluminum are also expected to increase this year. In fact, according a report by Bloomberg, aluminum prices rose to their highest point this year due to concerns that global supplies will be limited. The Bloomberg report states that, “In Brazil, aluminum companies producing at the lowest level in 12 years expect authorities to ration power supplies as a drought curbs hydroelectric generation, and Alcoa Inc. said it will cut output at two smelters. Russia’s United Co. Rusal, the biggest producer, said its output would fall to the lowest in at least eight years.”
On a concluding note, for Alcoa to continue its growth momentum, it has to strike a perfect balance between supply and demand. Its stock has increased more than 20% this year and looking at its future prospects, it is expected to rise further.