Shares of Alcoa Inc. (AA) touched a new 52-week high of $15.76 on Jul 9, a day after the U.S. aluminum giant reported better-than-expected second quarter results. The stock closed a notch lower at $15.69 at the end of trading yesterday.
Alcoa has delivered a solid one-year return of about 99.3% and year-to-date return of 47.2%, outperforming the S&P 500. Average volume of shares traded over the last three months is approximately 16,806K.
Alcoa has beaten the Zacks Consensus Estimate three times in the trailing four quarters with an average surprise of 42.12%. The company has a market cap of $18.4 billion and long-term expected earnings growth of 7%.
What’s Driving Alcoa Up?
Alcoa’s second quarter adjusted earnings skyrocketed 157% to 18 cents per share from the 7 cents earned in the year-ago quarter. Strong results from its downstream and primary metals businesses, aided by higher aluminum pricing led to the improved results.
Alcoa’s adjusted second quarter earnings outpaced the Zacks Consensus Estimate by a healthy 38.46%. Moreover, the company continues to expect alumnum demand to rise 7% this year.
Alcoa, a Zacks Rank #3 (Hold) stock, is seeing strong momentum in the automotive and aerospace markets. The automotive industry is expected to offer significant opportunities this year and beyond. Alcoa reaffirmed its expectations of 8%–9% global growth in the aerospace sector in 2014 on the back of strong demand for both large commercial aircraft and regional jets.
Alcoa’s growth forecast for other markets are – automotive (1%-4%), packaging (2%-3%), and commercial building and construction (4%-6%). Alcoa raised its 2014 expectation for the North America commercial transportation market to a range of 10% to 14%, from a previous range of 5% to 9% partly due to rising truck orders and backlogs.
Moreover, the company’s acquisition of jet engine parts maker Firth Rixson for $2.85 million will strengthen its robust aerospace portfolio, with a wide range of multi-material, value-add jet engine components. The acquisition is expected to contribute $1.6 billion in incremental revenues and $350 million in earnings before interest, tax, depreciation and amortization (EBITDA) in 2016.
The company also announced two organic investments in its Power and Propulsion (APP) business in the Engineered Products and Solutions segment totaling $125 million to meet increasing demand for next-generation jet engine components. APP revenues are expected to reach $2.2 billion in 2016.
In Alcoa’s Global Rolled Products segment, the automotive expansion in Davenport, IA, is complete and will continue to ramp up production in the third quarter to serve the growing demand for aluminum intensive vehicles. Alcoa’s second automotive expansion in Tennessee is expected to complete in mid 2015. The amount of aluminum body sheet content in North American vehicles is expected to quadruple by 2015 and increase tenfold by 2025 from 2012 levels.
Moreover, Alcoa remains committed to cutting costs in its upstream businesses and driving profitability in its midstream and downstream operations. The company has implemented a number of restructuring measures and is aggressively pursuing cost-cutting actions. The company, during the second quarter, completed the curtailment of 147,000 metric tons of smelting capacity in Brazil at Sao Luis (Alumar) and Pocos de Caldas.
Key Picks from the Sector
Some better-ranked stocks in the mining sector include Kazakhmys PLC (KZMYY), Paramount Gold and Silver Corp. (PZG) and Thompson Creek Metals Company Inc. (TC). All these stocks carry a Zacks Rank #2 (Buy).
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