We have retained our Neutral recommendation on aluminum giant Alcoa (AA). While healthy demand outlook across auto and aerospace markets is encouraging, we continue to tread with caution given the weak aluminum pricing.
Why Held?
Alcoa racked up a loss on a reported basis in second-quarter 2013, reported on Jul 8, hurt by hefty restructuring and legal charges. Weak aluminum pricing was masked by strong demand from aerospace and auto markets. Barring items, earnings matched the Zacks Consensus Estimate while sales beat. The Pennsylvania-based company reaffirmed its demand forecast for 2013.
Alcoa is seeing strength in the aerospace and auto markets. The company, which makes aircraft fasteners, is seeing improving airline fundamentals. It expects 9% to 10% growth in the aerospace market in 2013, backed by higher air travel demand, new aircraft orders (roughly 900 orders/commitments were signed in Paris Air Show), strong existing order backlog and a rebound in the jet segment.
The auto industry is also showing strength with new vehicle sales in the U.S. rising 9% year-over-year to roughly 1.4 million units in Jun 2013. Moreover, as per automotive original equipment manufacturers (OEMs), the use of aluminum in cars is expected to double by 2025 as automakers seek more fuel efficiency by reducing vehicle mass.
Moreover, Alcoa is pursuing strategies to move down its cost curves in its upstream businesses and drive profitability in its midstream and downstream businesses. The company is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions.
However, Alcoa continues to grapple with weak aluminum pricing. London Metal Exchange (LME) cash price fell 8% sequentially in the second quarter, hurting the company’s sales in the process. Aluminum (for three-month delivery) traded $1,758 a ton in Jun 2013, a nearly four-year low.
In addition, Alcoa is still witnessing softness across building and construction and commercial transportation markets. It expects weakness in non-residential building and construction market to persist in Europe and expects a 4%-6% decline this year. Our view takes into account these factors.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are Impala Platinum Holdings Ltd. (IMPUY), Stillwater Mining Co. (SWC) and Avalon Rare Metals Inc. (AVL). While Impala Platinum and Stillwater Mining hold a Zacks Rank #1 (Strong Buy), Avalon Rare Metals retains a Zacks Rank #2 (Buy).
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