A Few Reasons to Consider Alcoa for the Long Run

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Jan 22, 2015
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Alcoa (AA, Financial) had cheered the Street with its recent results that came in above consensus estimates. This was mainly driven by higher aluminum prices and lower raw material costs, which bolstered its metals business. The company has diversified itself to produce metal and alloy products for aerospace, auto and other industries. After undergoing various challenges last year, Alcoa reported steady growth during the fiscal. Starting with its numbers, let’s have a detailed analysis of this stock.

Why Alcoa is improving

Alcoa has benefited significantly from rising aluminum prices. Interestingly, in spite of a global aluminum surplus the prices have yanked up and this helped the company to improve its balance sheet. Along with this, its diversified product portfolio has further strengthened its business with orders ranging from aerospace to the auto segment.

Alcoa is receiving a number of orders from commercial jet manufacturing companies such as Boeing and jet engine maker Pratt & Whitney. It also started the world’s biggest aluminum-lithium plant in Indiana to make parts for aerospace industry. And to further strengthen its hold, the company would buy a U.K.-based aerospace component maker Firth Rixson Ltd. Alcoa has a strong portfolio of products such as the A380, which is its proprietary 7085 alloy.

Impressive end-market fundamentals

In addition, the management cites strong fundamentals of the aerospace industry in the days ahead. The company is also benefitting from the high margin auto body sheet market even as the auto industry is shifting from steel to aluminum components. The company is supplying military grade aluminum to Ford Motor co. for the new F-150 pickup truck. Although the company has some concerns over Europe and China, Alcoa is counting on a strong performance from the rest of the world. Heavy truck and trailer is yet another category where the company sees a strong momentum being built up.

Other markets where the company anticipates strong growth in the coming days include building and construction. The management said, “As people are becoming more and more conscious of energy efficiency and the total cost of our building, people are looking more for getting a greener building and more energy-efficient buildings.” Consequently the company believes this segment will grow three times the market in next two years. However segment such as packaging and industrial gas turbines are showing slackness in some regions of the world.

Going forward, Alcoa sees huge growth potential both in commodities and products. After struggling heavily last year, it made a nice comeback from the beginning of this fiscal. The company also made significant improvements in its cost curve, which further added to its bottom line. Moreover, its innovative products will act as a strong back bone for the company in the coming years.

Conclusion

Currently it does not have any trailing P/E compared to the industry P/E of 20.2. But its forward P/E looks impressive at 14.34. Alcoa had a solid performance during the quarter and seems to be well positioned for growth in the future as well. The company is benefiting from both sides, which include the commodity market and a diversified portfolio of products. In fact the management claims to have the broadest product portfolio. Looking at the charts the stock has doubled in the past year and is expected to proceed with the same momentum. Therefore, considering all the above factors Alcoa seems to be a good investment option.