Alcoa Poised for Growth on Strong Aerospace, Auto Demand
On Oct 10, we issued an updated research report on Alcoa (AA). The U.S. aluminum giant is well placed to gain from strong demand across aerospace and automotive markets, and portfolio transformation. However, it remains exposed to a volatile pricing environment and weakness across some of its end-use markets.
Alcoa’s profits shot up in the third quarter of 2014, reported on Oct 8, on healthy results across its downstream and legacy primary aluminum businesses, aided by higher aluminum pricing and productivity gains. Both revenues and adjusted earnings topped Zacks Consensus Estimates. The company continues to expect aluminum demand to rise 7% this year.
Alcoa is seeing strength in aerospace and automotive markets. The company, which makes aircraft fasteners, is witnessing healthy airline fundamentals. It has backed its global growth expectations of 8%–9% in the aerospace sector for 2014 on the back of strong demand for both large commercial aircraft and regional jets.
Alcoa has been actively focused on expanding its aerospace business lately. The move to buy U.K.-based leading jet engine components maker Firth Rixson represents a significant milestone in Alcoa’s portfolio transformation strategy. The $2.85 billion acquisition will further strengthen Alcoa’s robust aerospace portfolio, enabling it to achieve additional aerospace growth with a broader range of multi-material, value-added jet engine components.
Alcoa also announced two multi-year contracts worth more than $2 billion with Boeing (BA) and Pratt & Whitney in the third quarter. The deal with Boeing makes Alcoa the sole supplier of wing skins on all of the former’s metallic structure airplanes.
The automotive industry is also expected to offer significant opportunity this year and beyond. Alcoa sees meaningful growth of aluminum use in the auto sector in 2014 as automakers increasingly look for the metal as a cost-effective mean to boost performance, safety, durability and fuel efficiency of their vehicles.
Moreover, Alcoa remains committed to move down its cost curves in its upstream businesses and drive profitability in its downstream business. The company has taken up a number of restructuring measures and is aggressively pursuing cost-cutting actions. It is actively repositioning its portfolio, including closure of high-cost smelters.
However, Alcoa is still witnessing softness across building and construction and commercial transportation markets in Europe. It expects weakness in non-residential building and construction market to persist in Europe and expects a 2%-3% decline this year. Alcoa also expects commercial transportation market to decline 7%-10% (versus a 1%-5% fall expected earlier) in Europe in 2014. The company also sees weak demand in the industrial gas turbine market.
While improved pricing aided Alcoa’s results in the third quarter, it is still faced with a volatile aluminum pricing environment. Aluminum prices remain under pressure given the oversupply of the metal in the market.
Key Picks from the Sector
Other mining companies worth considering include Hi-Crush Partners LP (HCLP) and U.S. Silica Holdings, Inc. (SLCA) with both holding a Zacks Rank #1 (Strong Buy).
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Read the Full Research Report on AA
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