Alcoa: The Crash Is an Opportunity

Alcoa (AA) shares have fallen rapidly in 2015 as the company has been hurt as a result of weak aluminum prices due to end-market oversupply. In fact, Alcoa has dropped over 37% in 2015 as the company sees oversupply in the end market increasing this year. But, I think that the stock’s precipitous drop in 2015 is an opportunity that investors should not miss since it is capable of getting better. Let’s see why.

Transforming the business

Alcoa’s long term prospects seem strong mainly because of its transformation from an aluminum producer into a manufacturer of high value aluminum products.
In this direction, the company has announced a realignment of its downstream business. Under this plan, it will segregate its portfolio into two segments, of which one will focus on core aero space and the other on the construction and the commercial wheels markets.

To this end, its various acquisitions in the recent past such as RTI, Firth Rixson, and TITAL are well in line with its ongoing strategy and will prove beneficial in the days ahead. As per Market Watch, “The Engineered Products and Solutions (EPS) segment, led by Group President Olivier Jarrault, has been streamlined to enable a core focus on Alcoa’s position as a premier aerospace partner.”

Meanwhile, the company has also formed two new segments known as Alcoa Wheel & Transportation Products and Alcoa Building & Construction Systems, both of which were formerly a part of EPS. This is a leading development that will help the company to expand its presence into new horizons even while strengthening its position in the existing market. This is because Alcoa will be able to appoint a specialized team to target this particular end market.

In addition, Alcoa is also streamlining its operations and will permanently close its Pocos de Caldas primary aluminum smelter in Brazil. This is the right thing to do especially considering the present pricing environment, and the move will streamline its operations in the days to come. As per Forbes:
“The reduction of smelting capacity is in line with the company’s transformation of its product portfolio towards value-added products. Alcoa has curtailed, as well as permanently closed, significant amounts of smelting capacity over the past couple of years, as it reduces its dependence on its commodity businesses and instead focuses on its value-added businesses.”

Conclusion

Alcoa shares have taken a massive hit this year, but the company’s valuation is indicative of the fact that its earnings performance is going to improve in the future. For example, it trades at 20 times last year’s earnings, but the multiple comes down to 11.5 on a forward P/E basis. This means that its bottom line performance will get better in the future, making the stock a good investment on the dip especially because it is taking steps to streamline its operations.
Published on Sep 20, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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