Is There Hope for Alcoa?

Alcoa reported its fourth quarter and full year 2015 results last week on 11th January 2016. Alcoa made an adjusted net profit of $ 65 million or $ 0.04 per share in the quarter while that of $ 121 million or $ 0.56 per share in the last year. The adjusted EBITDA for the fourth quarter was $ 590 million including $ 71 million of special items.

The revenue for the quarter was $ 5.2 billion i.e. 18 % down from the same quarter of 2014 and 6 % down from the previous quarter.
The reasoning given by Alcoa for the decline in revenues was that it was a “composition of two opposing factors. One is a 7 % growth year over year mainly to aero, as well as acquisitions, and that gets offset by price declines as well as divestitures and closures of 25 %.”

Looking at segment wise performance, the Value-Add segment earned revenue of $ 3.3 billion and an adjusted EBITDA of $ 448 million in the quarter. Under the value-add segment, the Global Rolled Products (GRP) business recorded an after tax operating income of $ 52 million boosted by an 18 % year-over-year growth in auto sheet shipment. Driven by a shift in revenue mix towards higher margin products, the adjusted EBITDA per metric ton increased 19 % year-over-year. In the Engineered Products and Solutions (EPS) business, Alcoa earned record revenues of $ 1.4 billion in the fourth quarter and aerospace revenues were up by 34 % on a year-over-year basis. The operating income from the EPS business was $ 123 million. The Transportation and Construction Solutions (TCS) business made $ 40 million after tax operating income with record fourth quarter adjusted EBITDA margin of 14.6 %.

Revenue from the upstream business was $ 2.4 billion, with an operating income of $ 58 million and an adjusted EBITDA of $ 239 million. The earnings from this segment were low due to a sequential price declines of 24 % in alumina and of 1 % in aluminum (down 43 % and 28 %, respectively, in 2015). Reporting a profit under these conditions would easily qualify for the most important highlights for the upstream segment. One good sign here is that in addition to alumina, the performance of primary metals in terms of adjusted EBITDA per metric ton has improved. Also, Alcoa is forecasting a deficit in alumina and aluminum supply for year 2016 while a robust 6 % growth in demand is also projected.

The operating cash flow for the quarter was $ 865 million and the free cash flow was $ 467 million. The total cash on hand in Alcoa’s balance sheet at the end of the quarter was $ 1.9 billion.

Productivity Gains:

Productivity gains of $ 350 million in the quarter and $ 1.2 billion in the year were another positive. And the best part was that they came from not just one segment. Very strong productivity gains in all segments contributed $ 212 million in after-tax savings, more than offsetting $ 92 million in cost increases for the quarter. For the full year 2015 too, productivity continued to be a major lever for Alcoa. Full year after-tax savings of $ 749 million more than offset $ 447 million in cost increases. On an operational basis, Firth Rixson and RTI made solid contributions to the after-tax productivity gains of $ 54 million. Alcoa also has also beaten its own full year target of $ 900 million from productivity gains.

In all the three businesses under the Value-Add segment, the productivity gains had the highest contribution towards offsetting the negative impact of lower volumes, currency and unfavorable price-mix and keeping the after-tax operating income flat compared to the same quarter of 2014.

On the other hand Alcoa announced curtailments of nearly $ 2.2 million metric tons i.e. 15 % of the operating capacity of its Alumina business. This action, along with the continued strong productivity efforts helped to improve the competitiveness of our refining business.

Aluminum Market Prospects:

Year 2016 is being looked forward to with a lot of hope by the aluminum producers. The supply/demand curve is working in the Alcoa's favour. Alcoa expects a global aluminum deficit of 1.2 million metric tons and a global alumina deficit of 2.8 million metric tons due to global curtailments. As a result the demand for aluminum may increase by 6 % to reach a record of 60.5 million metric tons. Through the current decade, the global demand for the metal is projected to double in comparison to 2010 levels.

For the Value-Add segment, Alcoa expects global aerospace sales to grow 8 % to 9 % over 2015 on continued robust demand for large commercial aircraft and jet engines. The global automotive production is expected to grow 8 to 9 % and the building and construction market 4 % to 6 %. However, the US heavy duty truck and trailer market is expected to decline 19% to 23% this year.

All in all, the long term future of aluminum market is looking cool and this should motivate the investors to buy the stock which is trading at its lowest levels in more than 25 years.
Published on Feb 1, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...