Is Alcoa a Sell?

Alcoa (AA) has been reporting continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, eating into the margins of the company and forcing it to minimize core capital expenditures.

The right moves

Alcoa is impressively and profitably expanding its portfolio of worldwide rolled products with 3rd party sales revenue from 2013 till 2016 targeted at $1.0 billion and EBITDA margins recorded at or exceeding the average historical peak of $344/MT primarily driven by solid entry into the N.A.
auto sheet market, healthy market share expansion and growth in commercial transportation market segment including, China growth, attractive market growth prospects and notable growth in Latin America.

These positive factors were somewhat impacted by certain negative factors as well including, volume and pricing pressure in the worldwide packaging market, a slowdown in Russia and Brazil and weaker foreign currency translations.

Smart moves

The key aluminum manufacturing company is steadily growing its year-over-year EBITDA margin with September year-till-date 2015 annualized EBITDA margin of 22% and targeted complete fiscal year 2016 EBITDA margin of approximately 23%, primarily driven by notable strength in large commercial aircraft market segment, well-planned and timely acquisitions, in addition to share expansions through innovation.

These growth factors were somewhat offset by certain negative factors including, continuing commodity pricing pressure, reduction of defense, oil and gas expenditures, softening of European IGT and destocking of Fastener.

Alcoa is strategically transforming worldwide rolled products by aluminizing the globe through targeted capturing of the accelerating trend of accepting light-weighting materials, growths in key regions and strategic markets and unique commercialization of upsetting Micromill manufactured goods and processes.

The steel manufacturing company is focused on diversifying its product portfolio by penetrating into newer market segments while maintaining a healthy balance sheet with notably expanding profit margins and minimizing the non-core expenditures.

A strong portfolio

The BCS product portfolio of Alcoa is a comprehensive set of key engineered solutions including, Kawneer Sunshades/ Light Shelves, Reynolux Roofing Panels, Kawneer Curtain Wall Systems, Window Wall Systems and several other key products which are believed to drive sustainable long-term growth for the company. The emerging markets are driving a total international growth of 76% with BCS strategically positioned to grow in major global markets.

Alcoa is strategically focusing on lowering the days of working capital to deliver significant cash flows. The value-add days of working capital were reduced by 1 day for core business and upstream days of working capital were reduced by 16 days to drive long-term sustainable cash flows and in line Alcoa’s continued commitment to deliver healthy long-term growth while providing sustainable shareholder returns.

The strategic penetration into the global emerging steel markets coupled with a targeted execution to minimize the days of working capital is believed to drive significant top line growth for the company while placing it well ahead of its competitors in terms of well-diversified product offerings.

Importantly, Alcoa is witnessing an oversupplied global aluminum market steadily shifting to shortfall with international steel demand forecasted to grow by 6.5 percent during 2015 after the key demand for aluminum having declined over 40% from the highest in 2011. The company has reduced its China consumption estimate to 9.3 percent during 2015, from 9.5 percent earlier. However, Alcoa still estimates worldwide demand for aluminum to become twice from 2010 till 2020.

The consensus estimate among 19 polled investment analysts evaluating Alcoa Inc. suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments got better on Sep 08, 2014. The earlier consensus estimate suggested investors to hold their position in the company.

A majority of the key investment analysts are extremely positive about the long-term growth prospects of Alcoa, primarily driven by steadily improving global commodity demand and pricing environment as the recession in China is soon forecasted to end which would again push the demand for major commodities and thus improving their pricing, growing the company’s key margins.


Overall, the investors are advised to “Hold” their position in Alcoa Inc. looking at attractive long-term growth prospects of the company as the international demand and pricing scenario gets better. Moreover, Alcoa is currently debt-burdened with a significant total debt of $63.53 billion against weaker total cash position of $1.92 billion only, restricting the company to make future growth investments. The profit margin of -0.54% is also disappointing and signifies no profit but loss. However, the PEG ratio of 6.48 suggests healthy company growth and comparable to the industry’s growth average of 1.03.
Published on Apr 6, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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