On Jan 14, we issued an updated research report on Alcoa (AA). While the U.S. aluminum giant is well placed to gain from strong demand across aerospace and automotive markets and ongoing portfolio transformation, it remains exposed to a volatile pricing environment and weakness across some of its European end-use markets.
Alcoa ended 2014 on a strong note with both revenues and adjusted earnings topping Zacks Consensus Estimates in the fourth quarter of 2014, reported on Jan 12. It swung to a profit on a reported basis in the quarter on strength across aerospace and automotive markets, higher metals pricing and productivity gains. The company expects aluminum demand to rise 7% this year and also provided a strong forecast for the aerospace market.
Alcoa is witnessing healthy airline fundamentals. It expects the aerospace market to grow 9%-10% in 2015 on the back of strong demand for large commercial aircraft, regional jets and jet engines.
Alcoa has been actively focused on expanding its aerospace business lately. The recent acquisition of 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 has allowed Alcoa to penetrate into a highly specialized segment of jet engine forgings and has further strengthened its robust aerospace portfolio.
Alcoa recently made another major push into the aerospace market as it agreed to buy Germany-based Tital in a bid to leverage strong growth in the commercial aerospace sector and capture rising demand for advanced jet engine components made of titanium.
Alcoa has also landed two multi-year contracts worth more than $2 billion with Boeing (BA) and Pratt & Whitney, further underscoring its efforts to strengthen its aerospace business.
The automotive industry is also expected to offer significant opportunity. Alcoa sees continued growth of aluminum use in the auto sector in 2015 as automakers increasingly look for the metal as a cost-effective mean to boost performance, safety, durability and fuel efficiency of their vehicles.
Alcoa is also making a significant progress with its joint venture with Ma’aden in Saudi Arabia. The joint venture is developing the world’s lowest-cost integrated aluminum facility which, when fully ramped up, is expected to offer significant cost advantage to the company.
Moreover, Alcoa remains committed to move down its cost curves in its upstream businesses and drive profitability in its downstream business. 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 building and construction market to persist in Europe and expects a 2%-3% decline this year.
Alcoa also expects the heavy duty trucks and trailer market to decline 5%-10% in Europe in 2015. Orders remains down in this market in Western Europe. The company also expects a decline in the packaging market in North America.
While improved pricing aided Alcoa’s results in the fourth 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 Coeur Mining, Inc. (CDE) and Denison Mines Corp. (DNN) with both holding a Zacks Rank #2 (Buy).
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