Alcoa’s (AA, Financial) transformation strategy is progressing well. Alcoa recently posted strong results. However, the company's revenue remained flat for the quarter. Alcoa was under pressure in the past due to weak aluminium prices, but the transforming moves and entering into light weighing materials has relentlessly improved its operational performance. Moreover, the management of the company is also positive about the changing trends and improving market conditions. Due to such strong points, Alcoa is all set for a better future quarter. Let us have a look at the overall underlying business of the company.
Results and prospects
Alcoa posted revenue of $5.84 billion which is marginally flat as compared to $5.85 billion. The revenue also beat consensus estimates of $5.63 billion. Alcoa’s profit also impressed the investors by reporting $138 million. Alcoa had $518 million from cash operations and $260 million from positive cash flow.
Alcoa saw strong operational performance. The transformation in changing its portfolio has added much value to Alcoa. Alcoa was struggling in the past due to weak commodity prices. The share price was falling but the transformation in the portfolio and the recovery of the weak commodity segment helped Alcoa to soar high. Alcoa is making efforts to gain more momentum in the market. It is focusing on selling products from its more profitable business including truck wheels and aircraft fuselages.
Alcoa is seeing good opportunities with the growing aerospace segment. The company is expected to see a good 8-9% growth with this aerospace segment. Considering these positive indications, Alcoa’s management is showing interest for entering the aerospace industry. Analysts believe that entering a high growth aerospace segment is a wise move by the company, as this will help Alcoa to improve its market share in the future. However, this can take some time to reflect on the share market. This will be a long term move by Alcoa.
Automotive growth looks impressive
It is evident that the automotive segment in the U.S and Europe is gaining steam. With the recovery in the U.S economy, the automotive industry is expected to grow by a good 2-5%. This will improve the buying potential of the customers, which will improve the demands for new vehicles. In Europe, the registrations are up by 7% and the production is also slightly up by 0.1%.
This gives a bright opportunity for Alcoa, as the aluminium demands will rise, giving the company exposure to better operational performance. In this league, Alcoa is further seeing strong growth opportunities in the heavy duty trucks segment. The company has increased its growth projection and has ramped up the production. If this remains in line with the plans, Alcoa is expected to see a good 15% growth year over year.
Alcoa is undertaking various strategies to be more profitable in future. The company is accelerating in two main objectives. First, it is focusing on building a lightweight multi-material innovation powerhouse. With this, Alcoa is bringing in aluminium lithium, which is a very innovative solution as the company has announced its entry in to the aerospace segment and this will help it to deliver lightweight solutions. This is expected to play a major role in making lightweight planes and parts.
There are some innovations that Alcoa made in its offering. Alcoa 951 was a remarkable innovation and came in as a breakthrough for durable bonding. This is expected to increase the demands for metal by 1 million tons by 2025.
Moving on, there are some bright spots on the commodity side as well. The company’s major focus is on the cost and Alcoa is looking at every possible driver.
Conclusion
The company doesn’t have a trailing P/E, as it is still incurring losses. While its earnings are growing at a steady pace, which can be seen by a forward P/E of 18.40, the transformation of the company towards the aerospace segment is expected to help it to gain market share in future.
Alcoa can be a good long-term holding, as the company’s earnings are growing impressively with the five year CAGR of 47.72, which is far better than the industry average. So as of now from an investment perspective, I would suggest the investors to definitely include Alcoa in their portfolio, as its short and long-term prospects are strong.
