Alcoa: Looking Past the Weakness

Alcoa (AA) disappointed the street with its third quarter results, which trailed analysts’ consensus estimates. Weak aluminum prices were one of the main factors that affected its numbers significantly in the previous quarter. Additionally, the economic turmoil in China and other global markets added to its headwinds. As a result of these challenges, its stock has fallen considerably since the beginning of this year, and the recent numbers will lead to more downside.

In fact, for the recently-reported quarter, Alcoa’s revenue fell 10.7% from last year to $5.57 billion, while earnings adjusted for special items declined to $0.07 per share as compared to $0.31 per share in the same period last year.
The numbers lagged the analyst’s expectations of an EPS of 14 cents on revenue of $5.57 billion. Apart from the headwinds mentioned above a part of this decline also comes from divestitures and closures as well.

Trying to counter the weakness

In the light of the prevailing headwinds, Alcoa has come up with a strategic plan to separate itself into two businesses -- the plane and car parts business and traditional aluminum smelting operations. As per recent information, its traditional business will retain the name Alcoa, while the other entity is yet to be named. Speaking on these developments with Reuters, CEO Klaus Kleinfield said, “We are interested in creating value for our customers, for our shareholders, for our employees, and at this point this is the option we see that creates the biggest value.”

This seems to be the right thing to do since the raw aluminum industry has been in troubled waters for quite some time on account of Chinese exports and a supply glut in the market. On the other hand, Alcoa’s aerospace and automotive segment has been a boon for the company.

Strong prospects in automotive and aerospace

Alcoa’s automotive revenue is expected to grow by more than two times by 2018. This expectation is based on the deals it has struck with major automotive giants. For example, in September, the company signed a deal with Ford under which it will provide components for the F-150 pickup, which is the best-selling vehicle in the U.S since 1982. The company anticipates strong growth projection in both Europe as well as America in the days to come.

In the aerospace segment, it has bagged a 1.1 billion contract from Lockheed Martin for 100% of the titanium-milled product to be used in the Joint Strike Fighter project. Its purchase of titanium supplier RTI was, in fact, focused in this direction. Such moves will further propel its growth forward in the days to come.


All in all, Alcoa’s prospects look strong as the company intends to divide its upstream and downstream business. The company has an impressive forward P/E of 14.92 as compared to a trailing P/E of 25.73, indicating that its earnings will improve in the future. Also, the stock looks quite cheap at current price levels as it has a price to sales ratio of 0.55, lower than the industry average of 0.86, which makes Alcoa an enticing bet.
Published on Oct 18, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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