Is Alcoa Finally a Buy?

Alcoa (AA) announced second quarter ended June 30, 2016 net sales of $5.3 billion, up 8.2 percent sequentially from $4.9 billion in first quarter of 2016 but, down 10.2 percent year-over-year from $5.9 billion in second quarter of 2015.

Alcoa declared second quarter of 2016 adjusted net income $213 million or $0.15 per diluted share, up 97 percent sequentially from adjusted net income of $108 million or $0.07 per diluted share in first quarter of 2016 but down 15 percent year-over-year from adjusted net income of $250 million or $0.19 per diluted share in second quarter of 2015.

The global lightweight metals manufacturer reported continued sequential improvement in both its top and bottom lines primarily driven by weaker alumina and aluminum pricing coupled with the key impacts of closed, divested and curtailed operations.

A closer look at the segments  

During the first half of 2016, Alcoa delivered net productivity of approximately over $27 million, lost total markets worth about $11 million, expanded over $3 million of share benefits and lost competitive pricing worth about $1 million.
Moving ahead, the company targets on ramping production for advanced engine platforms with enhanced isothermal operations requirement at Savannah and more than 60% of forged parts coupled with continuing qualification and ongoing restructuring. Importantly, Alcoa has achieved key synergies worth $47 million which is expected to be much ahead of the year-end 2016 goal of $51 million.

The upstream production cost structure of Alcoa comprises of refining and smelting cost structures that includes a majority 44% of conversion and 26% of bauxite in the refining activities coupled with alumina and conversion constituting 31% and 25% respectively in the smelting processes.

The upstream growth segments of Alcoa illustrated improved metal pricing with 22 percent better alumina price, 2 percent enhanced organic growth and aluminum pricing, somewhat offset by negative effects of closed, divested and curtailed operations. The company’s bottom line also grew slightly, particularly driven by enhanced key metals pricing, significant gains from a highly competitive portfolio driving primary metals and alumina segments profits, superior productivity savings and better overall pricing.

The strategic growth activities of Alcoa which are expected to be well ahead of the company’s expansion plans coupled with an extremely well-optimized cost structure is believed to drive sustainable long-term company growth while delivering attractive shareholder returns.

The engineered products and solutions segment of Alcoa grew 11 percent sequentially from $162 million in first quarter of 2016 to $180 million in second quarter of 2016, driven by a slight improvement in foreign currency translations, notable productivity and volume growth partially offset by unfavorable price mix and cost expansions. Transportation and construction solutions segment grew 18 percent sequentially from $39 in first quarter of 2016 to $46 in second quarter of 2016, again allowed by healthy productivity and volume growths.

However, Global Rolled Products (GRP) remained constant over the quarters. Further, the worldwide bauxite demand is forecasted to double in the forthcoming 10 years at a CAGR of over 7% and primarily driven by a significant Chinese demand. The key bauxite mines of Alcoa are strategically positioned to deliver reliable and consistent supply of bauxite globally.

Improving conditions

The general overview of aluminum market fundamentals includes the key metal remaining in deficit at about 775 kmt for the complete fiscal year 2016, worldwide inventories declining 50% compared to the peak 108 days of inventory during 2009 and consolidated aluminum price stabilizing steadily across the US Midwest, Europe and Japan. Going forward, Alumina market is about 1.5 mmt in deficit for 2016 with approximately 4% and 1% of demand and supply growths respectively during the year.

The slow but consistent improvement in key metals pricing globally is expected to drive continued long-term company growth while providing further opportunities to diversify its strategic growth operations and thus, deliver attractive investor returns.

Conclusion

Overall, the investors are advised to “Hold” their position in Alcoa Inc. considering the company’s significant long-term growth prospects but, currently weaker financial position with notable total debt of $9.07 billion against weaker total cash position of $1.38 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -2.31% seems disappointing. However, the PEG ratio of 3.18 indicates healthy company growth.
Published on Jul 15, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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