) recently conducted a ground breaking ceremony for its planned
$275 million expansion of the Tennessee operations. The expansion
is being carried out to meet the rapidly growing demand for
aluminum in the auto production segment and is supposed to be
completed by mid-2015.
While the automotive sector has been lagging in recent times,
Alcoa is adopting a long-term perspective with this move. The
company expects the demand for aluminum for auto production to
double by 2025 from the current levels.
we have argued in the past
, Alcoa's future growth is likely to come from value-added products
that it supplies to the automotive and aerospace sectors. The
company's fortunes currently tend to be volatile because of its
dependence on aluminum prices which don't always reflect the
fundamentals of demand and supply.
See Full Analysis for Alcoa Here
Alcoa's Value Added Products
Alcoa manufactures value added products in two business
segments: Global Rolled Products (GRP) and Engineered Products and
). Both divisions meet the needs of the automotive segment among
The GRP segment produces and sells aluminum plate, sheet and
foil. Products in this segment include rigid container sheet, which
is sold directly to customers in the packaging and consumer market
and is used in the production of aluminum beverage cans. This
segment also includes sheet and plate used in the aerospace,
automotive, commercial transportation and building and construction
The EPS division produces titanium, aluminum, and super alloy
investment castings, forgings and fasteners, aluminum wheels,
integrated aluminum structural systems, and architectural
extrusions used in the aerospace, automotive, building and
construction, commercial transportation and power generation
markets. These products are sold directly to customers and through
distributors. This division also manufactures hard alloy extrusions
products, which are sold to customers in the aerospace, automotive,
commercial transportation, and industrial products markets.
The GRP and EPS divisions have been largely responsible for
cushioning the impact of weak aluminum prices. Consider Alcoa's Q2
2013 results. In the GRP division, after-tax operating income
(ATOI) declined marginally on a sequential basis to $79 million
from $81 million due to low metal prices, largely offset by
productivity gains and higher volumes. But in the EPS division,
ATOI rose sequentially from $173 million to $193 million due to
innovation, productivity gains and higher sales volumes. In fact,
the EPS division recorded its best ever EBITDA margin in the second
quarter. Thus, these two divisions were relatively insulated from
the impact of low aluminum prices.
To appreciate the resilience and importance of these divisions,
one needs to consider the earnings numbers for the Primary Metals
division whose performance is dependent on aluminum prices.
Here, falling London Metal Exchange (LME) prices impacted ATOI
negatively by $81 million and was the major reason why ATOI fell
from $39 million in Q2 2012 to a negative $32 million in Q2
Alcoa Q2 2013 Earnings Presentation
The Tennessee Expansion
In its Q2 2013 earnings presentation, Alcoa projected that the
aluminum body sheet content per vehicle in North America will rise
from 14 pounds in 2012 to nearly 55 pounds in 2015 and 136 pounds
in 2025. This represents a mind-boggling ten-fold increase in
aluminum content per vehicle over the next 13 years. According to
the company, the increase in aluminum intensity per vehicle will
occur due to the new U.S. Corporate Average Fuel Economy (
) standards which demand better fuel economy in vehicles from
manufacturers. This can be achieved by replacing steel with
aluminum to make vehicles lighter.
In order to meet the industry's projected needs, Alcoa needs to
expand its production capacity. It has already been doing so by
investing nearly $300 million for the expansion of its Davenport
Works plant in Iowa. This project is currently underway and
scheduled to be completed by the end of 2013. However, it would be
sufficient to meet the projected increase in demand only till 2015.
The expansion of the plant in Tennessee is aimed at taking care of
the incremental demand beyond 2015. Most importantly, the long-term
supply contracts with customers are already in place for
incremental growth in production volume.
As a result of this expansion, we expect growth in revenues and
margins for the GRP and EPS segments beyond 2015. Since the company
hasn't yet disclosed details about the expected additional revenue
stream, we will have to wait till the next earnings conference call
to get a better idea of the same. However, any step that Alcoa
takes to expand its value-added products business is certainly
positive for its valuation and share price.
We have a Trefis price estimate for Alcoa of $7.
a Company's Products Impact its Stock at Trefis