Alcoa (AA, Financial) is hovering around 52-week lows after it reported Q2 earnings last week, missing on earnings estimate by $0.04 per share. The company’s revenue of $5.9 billion surpassed the analyst estimate by $110 million thanks to the company’s strong presence in the aerospace and automobile industry.
Even though all the attention that the aerospace sector catches, one of Alcoa's primary chances is in the automotive sector. The reason is quite simple: Aerospace applications have always desired the lightest-weight materials so as to increase the efficiency of aero planes. But aluminum has only in recent times acquired the attention of automakers looking for new fuel-efficiency principles whereas still providing the performance that vehicle-buyers claim.
The largest win for Alcoa has been the arrival of Ford’s (F, Financial) F-150 pickup truck, which has seen massive demand for its aluminum-heavy restyle. In spite of some manufacturing issues that have kept sales figures down, the desire for the truck displays that drivers are all set to hold aluminum and other lightweight metals as long as they don't negotiate strength and robustness. If more automakers snatch on the drift, it could produce even healthier outcomes for Alcoa.
Growth will come
Alcoa remains confident about the long-term potential of its target-customer businesses. For aerospace, the company decreased its guidance to a range in the middle of 8% and 9%, but Alcoa now presumes robust growth of 8% for 2016 and 13% in 2017. A three-percentage-point improvement in North American heavy-duty truck sales to 9% to 11% also divines well for the aluminum giant, however across the globe; prospects for the trucking industry appear even fragile than earlier. In most areas, Alcoa stays confident about its overall future potential.
In the second quarter, Alcoa produced $205 million in free cash flow. The company now holds $1.3 billion cash on hand, more than sufficient to function well. The company can even gaze into further acquisitions with the cash model it owns. It should also be kept in mind that the company prolonged its $4 billion orbiting credit line to 2020, a sign that Alcoa is set up pretty well financially at this time.
Looking ahead
Alcoa remains hopeful about how 2015 will pass. It appreciates revenue growth in the significant global aerospace arena of around 9% to 10%, as aircraft and jet-engine manufacture volume carry on to remain solid. Automotive production growth somehow will go on slower at 2% to 4%, and the stride of commercial transportation-related development will slow significantly to nearby 3% to 7% in North America and -1% to 3% universal. Generally, Alcoa for a second time realizes global demand for aluminum mounting at a 7% in 2015, equaling its stride in last year.
Alcoa expects good growth in the coming years and has a diversified presence which is a big plus for the company.
Conclusion
In my opinion, Alcoa is currently undervalued. The company is near 52-week lows and should move higher as aluminum prices recover. The company has diversified its business and should see strong growth going forward. Alcoa’s presence in the automotive and aerospace segment makes it a great value play. So, I expect Alcoa’s shares to rise in the near future.
