Is Alcoa Going to Go Down?

Alcoa (AA) announced first quarter ended March 31, 2016 total revenue of $4.9 billion, down 6 percent sequentially from $5.2 billion in fourth quarter of 2015 and 16 percent year-over-year decline from $5.8 million in first quarter of 2015.

Alcoa declared first quarter of 2016 adjusted net income of $16 million or $0.00 per diluted share, down 92 percent year-over-year from $195 million or $0.14 per diluted share in first quarter of 2015 and a significant sequential growth from a net loss of $701 million or $0.55 of diluted loss per share in fourth quarter of 2015.

The key metals global production company reported continued sequential and year-over-year decline in its top line primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with rising exploration expenditures, eating into the company’s key margins.

Making smart moves

The metals mining major has strategically diversified its overall revenue streams with aluminum supply to the two major automotive and aerospace segments including, international rolled products, engineered products and solutions, transportation and construction solutions, Alumina and primary metals which is believed to propel company’s growth despite ongoing weakness in the global commodity demand and pricing environment.

Moving ahead, Alcoa is focused on optimizing its overall financial position by maximizing cash on hand while controlling net debt through planned cost-optimization initiatives.
The company declared $1.4 billion of cash on hand by the end of first quarter of 2016. However, net debt for Alcoa continued to grow both sequentially and year-over-year despite ongoing significant cost-optimization company’s efforts.

The highly-diversified top line growth profile of Alcoa in addition to notable free cash flows generated during the quarter position it strongly for delivering sustainable long-term growth while offering attractive shareholder returns in the form of dividends and through strategic share repurchases.

Positive end markets

The global underlying aluminum demand is growing at over 5% while key metal supply is expanding just at 2%, providing significant room to grow for Alcoa. Robust automotive sales in the US along with continued attractive incentives and vehicle demand are increasingly driving the key automotive demand in North America. Further, there are solid automotive sales recorded in China and Europe and in line with the company’s automotive growth forecast in the range of 1 to 4 percent.

Going forward, Alcoa is estimated to witness a significant 1.4 MMT of global alumina deficit during 2016 with steel demand projected to grow at 4% whereas supply just expands at 1% for the year. The alumina price has also started to regain growth momentum after the latest drop in alumina price during January 2016.

The deficient global supply of steel compared to robust steel demand all through the globe highlights significant growth opportunity for the company while also increasing competition from other major global steel producers keen on capturing a majority of the total market share.

Alcoa is strategically strengthening its financial position by planned non-core asset sales including, 20 percent stake sale to Duet Group through the unique Bunbury Natural Gas Pipeline (DBNGP) in Western Australia (WA). Alcoa’s operations in Australia are believed to have nearly 30 percent of transmission capacity for the DBNGP for uniquely planned gas supply to the designated three core WA alumina refineries. Moreover, Alcoa has signed a $102 million strategic contract to sell the non-core Remmele Medical business that forms a key portion of the strategic acquisition of RTI International Metals (RTI) by the company to LISI MEDICAL.

Strong fundamentals

The aluminum manufacturing company has impressively delivered 4 days of additional year-over-year working capital growth achieved organically from the core business operations. Further, the strategic acquisitions have added nearly 10 days to the total working capital. Therefore, this seasonal growth in working capital is driving negative $681 million of quarterly free cash flows. Also, Alcoa delivered 47 days of working capital (DWC) on an average during the quarter, up 14 days from the same quarter last year, mainly driven by the effect of planned acquisitions.

Importantly, the Board of Directors at Alcoa Inc. recently declared a quarterly dividend on its common stock of $0.03 per share to be paid on May 25, 2016 to all the key shareholders as of May 6, 2016 and in line with its continued commitment to deliver attractive shareholder returns.

Alcoa seems hugely focused on strengthening its financial position by strategically growing its cash position through planned and timely share repurchases which has enabled the company to deliver sustainable and attractive shareholder returns. The continued year-over-year growth in Alcoa’s average days of working capital signifies robustness of its operations.

Conclusion

Overall, the investors are advised to “Hold” their position in Alcoa Inc. considering the company’s notable long-term growth prospects but weaker financial position with notable total debt of $9.10 billion against smaller total cash of $1.92 billion only, restricting the company to make future growth investments. The profit margin of -1.43% signifies no profit but loss. The PEG ratio of 2.22 signifies healthy company growth and comparable to the industry’s growth average of 1.60.
Published on Apr 20, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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