Alcoa (AA, Financial) had a decent start to fiscal 2015. The company reported good improvement in revenue but felt short of improving sales which is a matter of worry for the company. The results were decent but according to some analysts the results were not up the mark and Alcoa could have performed better. The commodity price market is somewhere a main reason behind weak Alcoa sales.
A closer look
But according to Wall Street, the company has enough room for growth. A good 4.8% improvement in the stock price in this quarter is a positive and clearly indicates that Alcoa is growing as this is a fast recovery after a 5.4% share price drop in the fourth quarter of fiscal 2013 when the company missed the earnings forecast. The management of the company is, however, expecting the demand for aluminium to rise in the future which can boost Alcoa’s performance in 2015.
Alcoa’s quarterly revenue improved by 7% to $5.82 billion on a year-over-year basis but failed to meet analysts’ estimates of $5.94 billion. On the earnings front, Alcoa reported EPS of $0.28 beating analysts’ estimates of $0.26 per share. There are many positive signs that are indicating solid growth in 2015. Let us have a look.
More improvement in the cards
Alcoa performance in the first quarter was impressive. A 14th consecutive quarter of improvement is a clear indication that the company is growing. There are some bright spots that are indicating a good fiscal year ahead. Alcoa has made some impressive moves in the past such as acquisition of TITAL, which is expected to give it titanium/aluminium structural casting in Europe. This is not enough as Alcoa has further announced acquisition of RTI which will also benefit it with good synergies in the future. Even after this, many analysts are thinking that Alcoa is underperforming.
But this doesn’t look concrete as the company is now focusing on various initiatives to improve its profitability. It is seeing good growth in the demand for aluminium. The recovering U.S economy is expected to improve the buying capacity of the customers which will ramp up different segment under which aerospace, automobile and construction industries are providing bright opportunities for Alcoa. In the airline segment, Alcoa is expecting passenger demand to increase by 7% which will also ramp up the cargo demand. The company thinks that it is in a solid position to meet the growing demand. This growth will also allow other segments such as regional jet segment to grow nicely.
Moving on to automotive segment, Alcoa is seeing a marginal growth between 1% and 4%. The company thinks that as U.S recovery is in infancy stage and will ramp up in future which will boost Alcoa’s chances in the automotive segment. The light duty truck segment is expected to grow smoothly which will have a strong impact on Alcoa’s performance in future.
To be more competitive in the market, Alcoa is using all its growth levers to explore exciting growth opportunities in the emerging markets. It is now focusing on bringing in new products with exciting innovations. Besides this, Alcoa is also shifting to higher value add and is also trying to spread its footprint in multi-materials by increasing its expertise in multiple technology areas.
The recovering economy has also softened the interest rates which brought in a good recovering in the housing segment. This has created good room for the construction business. With this growth in the construction business, the aluminium demand is expected to rise, giving good growth opportunities to Alcoa in 2015.
Conclusion
Now moving to the fundamentals, the stock with a trailing P/E of 63.29 is expensive but the forward P/E of 10.89 shows good earnings growth in the near term. The 14th consecutive quarter of growth clearly indicates that there is lot more to come from Alcoa. On the other hand, the recovering U.S economy can also benefit it. Considering all these valuation levels I would like to suggest the investors to definitely pick Alcoa now.
