Alcoa: The Long-Term Potential Is Still Bright

Alcoa (AA) has significant exposure to the Chinese market. As a result, weak demand and pricing for aluminum has impacted its results this year so far since the country’s growth has slowed down. In fact, Alcoa is seeing a consistent slide in pricing, as its Midwest transaction price plummet 27% and the smelting business lost 25% in pricing per ton last quarter. Also, the demand for commercial construction and automotive were quite low as compared to 2014 levels.

In addition, higher operating costs impacted Alcoa’s earnings by about $102 million last quarter.
As per management, this increase in its operating costs was due to higher maintenance costs, labor, and benefits, along with investments in growth prospects such as the Micromill and the LaPorte expansion. In my opinion, despite the recent pain, Alcoa still has growth pockets to count on that will drive its long-term performance.

A look at the growth pockets

Alcoa anticipates the global aerospace market to grow at a CAGR of 9% from 2014 to 2017, generating revenue of approximately $5.6 billion. It is seeing incredible growth for its multi-material aerospace solutions and all platforms such as Boeing and Airbus as well as engine platforms like Airbus Twin Aisle, Boeing Twin Aisle, and single Aisle.

Likewise, it expects its automotive and commercial transportation markets to generate revenue of about $1.1 billion and $1.6 billion, respectively, during this period. Also, it expects its building construction market to grow at a CAGR of 4% to 6% from 2014 through 2017, generating around $1.3 billion of revenue opportunity for the company. Moreover, significant innovation in rolling and wheel, coupled with strong leadership in green building and construction, will drive this growth in auto and construction markets.

Conclusion

Alcoa offers a lot of upside potential in the long run, even though its short-term potential might not be great. Its downstream businesses, particularly the aerospace and the automotive businesses, will power its growth in the long run. Moreover, the stock is pretty cheap as it trades at a trailing P/E of 26.74 and a forward P/E of 14.82. So, a drop in Alcoa’s stock price is an opportunity for long-term investors.
Published on Oct 23, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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