On Jan 14, we reaffirmed our Neutral recommendation on aluminum giant Alcoa (AA). While healthy momentum across automotive and aerospace markets is encouraging, we remain on the sidelines given the weak aluminum price environment.
Why Held?
Alcoa swung to a loss in fourth-quarter 2013, reported on Jan 9, on hefty goodwill impairment charges. Adjusted earnings missed the Zacks Consensus Estimate. Sales fell on weak aluminum pricing but beat expectations. The company expects aluminum demand to rise 7% this year.
Alcoa, a Zacks Rank #3 (Hold) stock, is seeing strength in aerospace and automotive markets. The company, which makes aircraft fasteners, is witnessing healthy airline fundamentals. It expects 7% to 8% growth in the aerospace market in 2014, backed by strength in the commercial segment, higher air travel demand, new aircraft orders and strong order backlog.
The automotive industry is also showing strength with U.S. auto sales increasing 8% year over year to 15.6 million units last year. Alcoa sees significant growth of aluminum use in the auto sector this year 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 midstream and downstream businesses. The company has taken up a number of restructuring measures (including closure of smelters) and is aggressively pursuing cost-cutting actions.
However, Alcoa continues to grapple with weak aluminum pricing. London Metal Exchange (LME) cash price fell 7% in the fourth quarter, hurting the company’s sales in the process. LME aluminum prices dropped to a four-year low during the quarter given the oversupply of the metal in the market.
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 2%-3% decline this year. Our view takes into account these factors.
Other Stocks to Consider
Other companies in the mining industry worth considering include General Moly, Inc. (GMO), Atlatsa Resources Corp. (ATL) and Tahoe Resources Inc. (TAHO). While General Moly holds a Zacks Rank #1 (Strong Buy), both Atlatsa Resources and Tahoe Resources retain a Zacks Rank #2 (Buy).
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