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Alcoa Is A Good Buy At Existing Price

August 19, 2014 | About:



Analysts forecast the Global Aluminum market to grow at a CAGR of 5.90% over the period 2013-2018. One of the key factors contributing to this market growth is the use of aluminum in the automotive industry. The Global Aluminum market has also been witnessing an increase in production capacities by major producers around the world. However, the high price volatility of aluminum imposes a headwind to the growth of this market.

Alcoa (AA) remains at the forefront of the aluminum industry. Alcoa is the world's largest aluminum provider, as well as a leading refiner of alumina and miner of bauxite. The company has a market capitalization of $18.75 billion.

The stock reached the peak of $39 in May 2008, and since then it has drastically plummeted to around $8.50. Nevertheless, investor sentiment is optimistic about Alcoa's future prospects. Analysts indicate a five-year growth forecast of 22%. Alcoa's shares, which are up around 18% so far this year, reflect the healthy earnings beat. The stock is up 51% over a year.

The company recently released its first quarter report of 2014. Revenues dropped roughly 6.5% to $5,454 million in the first quarter from $5,833 million in the year-ago quarter.

The bottom line posted a loss as bulky restructuring charges and weak aluminum prices weighed on its bottom line in the quarter. Loss of $178 million or 16 cents per share in the first quarter compared with a profit of $149 million or 13 cents per share in the year-ago quarter.

The company recorded $276 million in restructuring charges and other special items in the quarter, mostly related to smelter and rolling mill capacity reductions. The company announced curtailments and closures in Massena, Brazil and Australia which also leverage increase in the restructuring cost.

From the investor's point of view it is good to note that overhead costs are down both on a sequential and year-ago quarter basis. In the other income and expense line, a $28 million gain from the sale of our ownership interest in the Suriname gold company, Surgold, offset by startup cost in Saudi Arabia.

Moving ahead, the company anticipates the aerospace market will remain strong in the coming quarters which can influence its top line. The demand from the automotive segment will also boost its revenue as the demand for the aluminum wheel base is rising from this segment. It also expects a recovery in North America.

Alcoa has reaffirmed its global aluminum demand growth expectations of 7% for 2014.

Aerospace market

The company has invested $25 million in technology to produce lighter, primarily nickel-based airfoil blades for the industry’s best-selling jet engines. It will use advanced manufacturing technologies that include robotics and digital x-rays for enhanced product inspection. Alcoa has added equipment for a new production line and is focused on modifying existing machinery at the Hampton facility to produce the blades for the aerospace market. The expansion is planned to begin this month and is expected to be complete by the fourth quarter of 2015.

Alcoa currently holds leading market positions in aerospace forgings, extrusions, jet engine airfoils and fastening systems and is also a leading vendor for structural castings made of titanium, aluminum and nickel-based superalloys, which are produced by its downstream business, Engineered Products and Solutions (EPS).

The company also holds leading market positions in aerospace sheet and plate produced by its midstream business, Global Rolled Products (GRP). The company’s value-added businesses, comprising EPS and GRP, accounted for 58 percent of Alcoa's first quarter 2014 revenues and 76 percent of the company’s total segment after-tax operating income.


Looking into the Alcoa growth plans and its position in the aerospace market, the company is poised for growth. Alcoa can be a safe bet for investors.

Rating: 2.0/5 (1 vote)



Beans - 1 month ago

Bought shares at around $9.00. I have confidence the price will go higher. Ray

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