Second-quarter earnings season has just about come to a close,
and it seems like long ago when aluminum giant
led off the successful season with a strong report that helped
the stock continue its impressive advance. Even though Alcoa
earnings have shown some impressive results lately, the company's
long-term strategy also plays a big role in the recent rise in
investor confidence. Let's take a look at five choice comments
from last month's conference call.
Firth Rixson [is] a nice addition to our already strong
suite in aerospace, particularly in the jet engine side. ...
The technology that we will be adding there is absolutely
leading-edge, particularly the specialized isothermal process.
-- CEO Klaus Kleinfeld
The aerospace industry has been an essential part of Alcoa's
long-term success story, and the nearly $3 billion
acquisition of Firth Rixson
will help drive segment growth for the aluminum giant going
forward. In order to make engines and other components as light
as possible, lighter-weight materials have become more popular,
and Firth Rixson has specialized in rings, forgings, and other
specialty materials to improve efficiency.
Yet Firth Rixson also has exposure outside aerospace. With the
need for such materials in the energy generation and exploration
field, the acquisition should give Alcoa entry into what could
become an increasingly important sector for its long-term
Turning to the aluminum market, we've not changed our view
that market fundamentals are positive. -- CFO Bill Oplinger
For years, Alcoa has had to deal with weak aluminum prices,
hurting its commodity business. But after that long period of
aluminum has finally started to bounce back
, with prices recently hitting their best levels in nearly a year
and a half. A combination of low inventories and reductions in
production capacity has driven the price increases.
Moreover, Alcoa expects deficits between supply and demand to
widen further this year, supporting prices even more. If demand
starts to pick up, then that would only increase the trend toward
higher aluminum prices.
Ford's 2015 F-150 relies on aluminum. Source: Ford.
[Aluminum-intensive vehicles] go for better fuel efficiency
and superior performance ... [and] they allow the automotive
makers to meet the CAFÉ regulations with the 54 mile per gallon
target by 2025, because they reduce weight. -- Kleinfeld
Ultra ONE wheel. Source: Alcoa.
The new 2015
F-150 pickup truck has inspired high hopes for Alcoa and the
aluminum industry, as automakers have embraced the need to become
more fuel-efficient and have turned to lightweight materials to
meet their needs. Although the F-150 will break ground in the
move toward aluminum, industry experts expect Ford's competitors
to follow suit, especially if consumers respond favorably to the
new vehicles. Moreover, products like the Ultra ONE aluminum
wheel will also become more important in transportation, even in
the heavy-truck segment. With Kleinfeld having noted that average
fleet ages in North America are still about two years above the
historical average, there's plenty of pent-up demand for
vehicles, and Alcoa could benefit from that demand in the
We are building a lightweight multi-material innovation
powerhouse. -- Kleinfeld
In the past, Alcoa faced concerns about its ability to compete
against carbon fiber and other lightweight materials. To meet
that challenge, Alcoa has expanded its production capacity to go
beyond aluminum, incorporating titanium and other materials in
order to look at potential innovations using composite materials.
Firth Rixson also brings titanium expertise to the table, and in
time, gaining experience and proficiency in using multiple
materials could bring a flood of new products for Alcoa to
We are building a highly competitive commodity business. ...
[It] is not essential what your total volume is, but what is
essential is that the assets that you have are low on the cost
curve, and that's what we're doing. -- Kleinfeld
Even with all the attention to value-added materials, Alcoa
still intends to sell more basic aluminum products for industrial
use. Along those lines, the company has aimed at getting rid of
higher-cost operations in order to boost its margins as much as
possible while still giving Alcoa the flexibility to challenge
rivals on price. The value-add segment might drive profits, but
Alcoa nevertheless intends not to let its commodity business
become a loss-leader for the company.
Since its earnings announcement last month, Alcoa stock has
continued to climb as investors become more comfortable with its
progress. At least for now, Alcoa seems poised to pull off one of
the greatest turnarounds in recent years, and that's good news
for the aluminum giant and its investors.
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5 Things Alcoa's Management Wants You to Know
originally appeared on Fool.com.
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