Why Alcoa Can Stage a Recovery Going Forward

Alcoa (AA) had posted weak quarterly results recently. Its revenue was down 11 percent year-over-year from $6.24 billion in the third quarter of 2014 and down 5.5 percent sequentially from $5.90 billion in the second quarter of 2015.

Alcoa’s adjusted net income was also down 70.5 percent year-over-year from $370 million or $0.31 of diluted earnings per share during the same period last year and down 56.4 percent sequentially from $250 million or $0.19 of diluted earnings per share in the second quarter of 2015. The company has posted a sequential and year-over-year decline in both its top and bottom lines primarily due to oversupply in the aluminum market.

But, can Alcoa recover? Let’s find out.

A look at the positives

Moving ahead, Alcoa is focused on delivering robust operational and financial performance across all its key business segments, generating year-over-year productivity gains of $287 million during the third quarter and approximately $849 million year-till-date as compared to 2015 yearly target of $900 million.

The metals mining company is focused on enhancing its productivity and thus, it has successfully managed to reach near to its production target for the year while maintaining a strong balance sheet to further support these growth opportunities and deliver outstanding shareholder returns.

Alcoa has also concluded the strategic acquisition of RTI International Metals which is believed to enhance Alcoa’s key technology portfolio with sophisticated manufacturing technologies and expand its titanium offerings.
Alcoa also signed a strategic Lockheed Martin agreement worth about $1.1 billion that seeks superior titanium capabilities achieved through RTI.

The acquisition of RTI is forecasted to boost the already advanced products portfolio of Alcoa, growing its customer base and thus delivering impressive margins and shareholder returns.

A look at the end market

Alcoa sees more than 6.5 percent global demand growth for the complete fiscal year 2015 and global demand of over 3.5 percent, excluding China. However, the company has reduced its forecast for production growth of automotive segment to nearly 1 to 2 percent, from earlier expectation of over 5 to 8 percent.

It has also lowered the 2015 sales expansion forecast for construction and commercial building segment at below 4 to 6 percent from over 6 to 8 percent and reduced its 2015 trailer and heavy duty truck production estimate to below 22 to 24 percent, from below 14 to 16 percent.

In addition, Alcoa signed a key deal worth $1 billion with Airbus for providing advanced, multi-stuff binding systems. Alcoa entered into a combined growth deal with Ford Motor Company to jointly provide superior aluminum alloys leveraging Alcoa MicromillTM technology; Ford F-150 is expected to display Alcoa Micromill® material during 2016.

Alcoa intends to commercialize Micromill technology and it has strategically signed a global licensing contract with Danieli Group. Moreover, Alcoa has declared an investment of about $60 million to build an Alcoa Technical Center to develop on its additive modern abilities for aerospace segment and several other strategic growth markets.

It has started exclusive shipments from recently developed Alcoa, Tennessee automobile development facility and declared its intention to resume productions at Texarkana, Texas casthouse to serve significant aluminum demand from the automobile industry.

Going forward, Alcoa is believed to witness impressive top line growth through the strategic collaboration with other growth partners to expand its market presence while catering to the expanding global aluminum consumption demand.


All in all, despite a weak performance last quarter, Alcoa looks well-placed for the long run due to its productivity moves and growth in the aerospace segment. So, it will be a good idea to buy Alcoa keeping the long-term viewpoint in mind.
Published on Oct 25, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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