A Few Reasons to Buy Alcoa

Alcoa (AA) is not having the best of times on the stock market, but there are a number of areas that will help the company record growth in the long run. For example, Alcoa is experiencing strong growth for its heavy duty truck and trailer market. The company expects its North American heavy duty truck market to grow 9% to 11% in fiscal 2015.

This represents substantial growth from its previous projection of 6% to 8% growth in the starting of the year. However, Alcoa expects global heavy duty truck and trailer markets to decline 4% to 6% on a struggling economic growth in Brazil and China.

Growth in different areas

Likewise, it continues to see strong growth momentum in the end markets of automotive, buildings & construction, industrial gas turbine and packaging.
Alcoa expects the automotive production to grow 2% to 4% across the world, and approximately 1% to 4% growth in North America. Also, Alcoa sees around 5% to 7% growth in global sales for commercial buildings and construction markets. Moreover, it projects the global market for industrial gas turbine to grow 1% to 3% and the packaging market to grow 2% to 3% worldwide this year.

So, these strong fundamental across its end market suggest pretty strong outlook for Alcoa this year. It expects the overall aluminum demand to grow approximately 6.5% in 2015 worldwide.

Transformational initiatives will be growth drivers

Alcoa looks well placed with its transformative initiatives. Its effort of reshaping its portfolio, coupled with smart investment in growth markets are driving results for Alcoa. It is seeing tremendous growth in its value added businesses, strong profitability for its downstream as well as mid-stream businesses. Moreover, the recent acquisitions are well supporting its upstream business.

For example, this transformation has resulted in 16% upside potential for its earnings, driven by a $210 record downstream profit. In fact, its aerospace revenue was up 29%, while midstream and auto sheet saw a revenue growth of 9% and 180% respectively year-on-year.

Alcoa managed this slight increase in its revenue, despite lower realized price of aluminum for the quarter. The average realized price of aluminum for the quarter was $2180 per metric ton, which was 4.85% below as compared to second-quarter 2014 and 9.92% lower sequentially.

Acquisitions will enhance its performance

Alcoa will benefit from the integration of Firth Rixson and TITAL. These acquisitions are resulting in higher market share gain for aerospace engineered products and solutions. In fact, the company can now build more than 90% of all the structural and rotating components of jet engine through these acquisitions. Firth Rixson works on key jet engine program, while TITAL expands its titanium and aluminum structural castings for aerospace. Alcoa is capturing a lot synergy through these acquisitions.

For example, the company generated revenue growth of 29% in the aerospace segment. In fact, Alcoa expects Firth Rixson to enhance its revenue by incremental $1.6 billion and its EBITDA by more than $350 million by the end of fiscal 2016.

Conclusion

So, Alcoa has a lot of positives that investors should not ignore. Over the long run, the company can make an impressive recovery due to the growth areas discussed above. Hence, it makes sense to buy Alcoa’s drop as the stock is capable of outperforming in the long run.
Published on Oct 25, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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