Alcoa Is Set to Get Better in the Long Run

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Oct 28, 2014

Aluminum giant Alcoa (AA, Financial) swung to a profit in the second quarter on the back of productivity gains across its entire segments. Its engineered products and solutions delivered the highest operating EBITDA margins of 23.1% in its history so far. Also, the company witnessed steady performance in its upstream business for 11 consecutive quarters that helped the company to display better numbers for its top as well as bottom lines during the quarter. In addition, the company is now dedicated to selling more profitable products for its downstream business such as truck wheels and aircraft fuselages that brightens its prospects in the long-run.

Impressive outlook

Looking ahead Alcoa looks a good bet as the company is committed to transform its business. It is aggressively changing its product portfolio that should drive its performance in the second-half and deliver better returns to its shareholders in the long-run. Alcoa remains on track with its transformation strategy to include more value added business. It has recently signed a definitive agreement to acquire Firth Rixson, one of the leading companies in the world for jet engine components. This acquisition is expected to add incremental revenue of $1.6 billion annually and approximately $350 million in operating income by calendar year 2016.

The company has also invested around $125 million in Alcoa power and Propulsion or APP in order to enlarge its jet engine components. Alcoa expects APP to deliver revenue of about $2.2 billion by 2016. Alcoa is seeing an improved movement in the global aerospace segment and forecasts a growth of nearly 8 to 9% this year. It is experiencing comparatively a better demand in both for its large commercial aircrafts and regional jets that should improve its performance in the second-half of the year.

Volume improvements expected

In addition, Alcoa is seeing stronger volume in its mid and downstream business that should enhance its performance this quarter. Its midstream business offers global rolled products will additionally benefit from the growing demand for automotive sheets. The company is projecting automotive growth of 1 to 4%. Alcoa has accelerated its margins for the North America commercial transportation market to in the range of 10% to 14% from previous range of 5% to 9% on the back of strong demand in its parts for increasing truck orders and backlogs. However, it sees its some softness in the global commercial transportation as it experiences weakness in the European market.

Alcoa’s upstream business that includes alumina should deliver better show in the second-half on the back of improved aluminum demand. The company has reiterated its 7% global alumina demand this year that should enhance its performance. Also, the company is taking various strategic steps to uplift its alumina business.

Furthermore, its primary metal business now looks better with enhanced metal pricing and higher energy sales that should certainly drive its performance for the bottom line in the second-half.

Concluding remarks and valuation

Alcoa certainly looks resurrected; its stock has risen 48% this year so far as the company is aggressively building its capabilities in the end markets and expanding its reach on other profitable segments. Moreover, its shares are up about 98% in the past 12 months that certainly highlights the growth prospects for the stock in the future. So, investors can consider buying more of the shares that promises handsome returns in the future.