Credit: Shutterstock photoAlcoa (AA) is the world’s leading producer of primary and fabricated aluminum. It also has the major consumer brand Reynolds Wrap. The excitement in the Alcoa story is the company’s diversification into downstream markets such as aerospace and automotive.
With major European and American automobile manufacturers such as Ford (F) determined to reduce the weight of their cars and trucks, Alcoa has a major opportunity to grow the market for their aluminum auto parts business … and output in general. Ford has recently announced the first all-aluminum pickup truck, the 2015 Ford F150. This new truck will be 700 pounds lighter than the bestselling 2014 model and provide greatly improved gas mileage.
Alcoa has also introduced the world’s lightest heavy-duty truck wheel. The long-term implications for aluminum are very favorable particularly if General Motors (GM) and Chrysler decide to use more aluminum in their vehicles.
What all this speaks to is higher demand for aluminum and likely higher prices ahead. Alcoa estimates that global demand for aluminum will increase 7% in 2014. AA has gone through a restructuring, closing underutilized plants and expanding production capacity in growing markets like automotive and aerospace. If the price of aluminum which has been under pressure begins to firm up or improve, Alcoa is in an excellent position to benefit based on its increasing focus on the more the lucrative downstream opportunities.
On Thursday Alcoa announced a $2.85 billion acquisition of privately held aerospace parts manufacturer, Firth Rixson. This accelerates Alcoa’s turn toward the steadier, higher margin growth opportunities in the aerospace industry and away from the more volatile and price sensitive, commoditized aluminum production business. Firth Rixson, with a strong position in the jet engine and landing gear markets, had top line revenues of $1 billion in 2013 but its sales are expected to grow at a compounded growth rate of 12% a year through 2019 based primarily on long-term contracts already in place. This should begin adding to earnings in 2015 when synergies should result in savings of up to $100 million a year.
The Rixson acquisition will increase Alcoa’s aerospace revenues by 20% in 2014 to $4.8 billion, more than 20% of its current revenues of $22.6 billion. With strong downstream demand from the automotive and aerospace markets and the company’s efforts to streamline and restructure their production facilities, Alcoa is a very different company than the one which was booted out of the Dow Jones Industrial Average on September 20th of 2013. Since that time AA’s stock is up 83%, moving from 8.29 to a high of 15.18 on Thursday after the Rixson acquisition was announced. This price action, by the way, is common after a stock is removed from the DJIA.
Alcoa’s Very Bullish Chaikin Power Gauge rating is driven by the strength of the aluminum industry as well as increasing analyst earnings estimates and bullish analyst ratings. The stock has been in a strong, steady upward price trend since breaking out above 9 in October. This is supported by very positive Chaikin Money Flow which shows persistent institutional accumulation over the past 8 months. Although AA is overbought, any small pullback from the recent peak of 19.18 is a buying opportunity.
Alcoa kicks off 2nd quarter earnings season when they report after the close on July 8th. Their recent reports have been complex for the average investor to grasp as there have been numerous restructuring charges. Wall Street analysts however have come up with bullish takeaways and thus the increasing earnings estimates and strongly bullish Analyst Ratings.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
