It seems that the worst is over for Alcoa (AA, Financial). The company's growth in the previous quarter was mainly driven by strong growth in its automotive and aerospace businesses, coupled with favorable raw aluminum prices.
Key catalysts
Let’s see in detail all the factors that will drive its future growth. Starting with aviation, Alcoa has high hopes from the aerospace industry, considering the tremendous growth opportunity it has in 2015. The commercial jet order book currently stands at eight years of production, at the increased 2014 delivery rates.
Additionally, the airline industry looks fundamentally strong with the IATA predicting a 7% increase in passenger demand, while demand for cargo is expected to rise by 4.3%. Moreover, with expectations of a $25 billion boost in profits, the airline business has solid momentum, which will in turn benefit Alcoa and add to its top line in the days ahead. For 2015, the management anticipates a growth of 9% to 10% in this segment.
Anticipating this huge demand, Alcoa made a strategic move during the quarter and acquired Tital, which is a leading provider of titanium and aluminum products used in the manufacturing of aircraft engines and airframes. With this acquisition, the company will be able to expand its horizons beyond its traditional aluminum business into materials such as nickel and titanium, which is extensively used in making aircrafts.
Even as aircraft demand is expected to rise, Tital seems to be a good bet that will strengthen its financials. This new inclusion also indicates the company’s interest in businesses such as this, which will yield a good return in the days to come .
Another growth driver
Similarly, the company is counting on the automotive sector to continue this growth, with strong momentum in China and North America. It is expected that the automobile production in North America during the current year will be bolstered by the replacement of old vehicles and low lending rate. Consequently, the car makers in the region are preparing to roll out exciting new models in 2015 and Alcoa is all set to tap this potential, which will significantly improve its financials. Even the heavy duty truck market is also anticipated to have outstanding results in the region with growth seen between 3% to 7%.
On the international front, China also has a good story to tell with expectations of 5% to 8% growth on top of the 6.9% it saw last year. The numbers are driven by the increasing living standard of middle class people in the region, who are opting to buy a car. Along with this, the China clean air act imposed by the government will scrap old cars that are less clean, which would require replacement of around 15 million vehicles by 2017. On the other hand, Europe seems to have mixed sentiments on the back of macroeconomic headwinds. However, exports are expected to rise by 5.1% on a year over year basis. All these numbers will ultimately translate to give Alcoa the required boost to carry its growth trajectory in the coming years.
Conclusion
Going forward, considering these moves the company seems to be right on track but at the same time some analysts are skeptic as to the turnaround has started or not. Analyst Anthony Rizzuto of Cowen’s is positive about Alcoa; however, he argues that it is yet too early to invest in it. One of the main reasons he cites is of a downside risk considering the aluminum premiums that have increased over time. This could be a near term negative, while improving gradually. Moreover, as many of the major aluminum producers had curtailed their production in the past few years, it resulted in significant reduction of inventories, which is further backed by increased demand.
This is also a significant factor that will impact the metal’s future prices. Overall we see positives on various fronts, but at the same time short term headwinds could be a problem for now. Therefore, in the light of these facts investors could wait for a confirmation that the trend has reversed and a bullish rally has started.
