Shares of Aluminum giant, Alcoa Inc. (AA) hit a new 52-week high of $17.75 on Nov 21 and eventually closed at $17.45. Alcoa has delivered a one-year return of about 93% and year-to-date return of roughly 66%. Average volume of shares traded over the last three months was roughly 19,069K.
What’s Driving Alcoa Up?
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 the Zacks Consensus Estimates. The company continues to expect aluminum demand to rise 7% this year.
Alcoa is seeing strength in the 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 recently completed 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 further strengthens 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, through this acquisition, will penetrate into a highly specialized segment of jet engine forgings that need isothermal forging technology. Isothermally forged components are increasingly needed in jet engines that utilize higher turbine temperatures to beef up power output, boost fuel efficiency and cut emissions.
The Firth Rixson acquisition is expected to expand Alcoa’s annual aerospace revenues by 20% to $4.8 billion from $4 billion in 2013 on a pro forma basis and increase the contribution of the high-growth aerospace segment to the company’s value-add revenues to around 35% from 30%. Alcoa is also expected to realize significant cost synergy from the transaction with cost savings reaching over $100 million by the fifth year.
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 opportunities 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 moving down 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.
While improved pricing aided Alcoa’s results in the third quarter, it is still facing a volatile aluminum pricing environment. Aluminum prices remain under pressure given the oversupply of the metal in the market.
Alcoa is a Zacks Rank #2 (Buy).
Other stocks to consider
Other mining companies worth a look include Orbite Aluminae Inc (EORBF) and MAG Silver Corp. (MVG). Both of them hold a Zacks Rank #2 (Buy).
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