QUOTE AND NEWS
Forbes  10 hrs ago  Comment 
The acquisition is a significant boost to Alcoa's aerospace revenue. It grows Alcoa's aerospace revenue in 2013 by 20% on a pro forma basis, from $4 billion to $4.8 billion. The acquisition will boost Alcoa's overall revenue by $1.6 billion by...
Motley Fool  Nov 21  Comment 
Alcoa has been flying high lately, but it's still not immune to a possible setback. Find out why.
newratings.com  Nov 20  Comment 
NEW YORK CITY (dpa-AFX) - Lightweight metals major Alcoa, Inc. (AA) has concluded the acquisition of Firth Rixson, a global player in aerospace jet engine components. The transaction was closed after receiving all of the required global regulatory...
TheStreet.com  Nov 18  Comment 
NEW YORK (TheStreet) -- BMO Capital Markets assumed coverage of Alcoa  with a "market perform" rating and updated its price target to $19 from $14. The company, which is engaged in lightweight metals, products and solutions for various...
Forbes  Nov 17  Comment 
Consistently, one of the more popular stocks people enter into their stock options watchlist at Stock Options Channel is Alcoa, Inc. (NYSE: AA). So this week we highlight one interesting put contract, and one interesting call contract, from the...
TheStreet.com  Nov 15  Comment 
Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener. NEW YORK (TheStreet) -- Here's what Jim Cramer had to say about some of the stocks callers offered up during the Mad Money Lightning...
Forbes  Nov 12  Comment 
In the latest look at the underlying components of the S&P 500 ordered by largest market capitalization, Alcoa, Inc. (NYSE: AA) has taken over the #240 spot from Dollar General Corp (NYSE: DG), according to The Online Investor. Click here to find...




 

Alcoa is the world's leading producer and manager of primary aluminum, fabricated aluminum, and aluminum facilities, with a revenue of $21.0 billion in FY 2010.[1] Revenue in 2010 reflects an increase from the $18.4 billion generated as revenue in FY 2009.[1]

Alcoa’s core business is largely dependent on world aluminum markets. World production of Aluminum in 2010 is increasing from a fall in 2008-2009. Aluminum demand is being driven up by the Chinese government’s stimulus, which has single-handedly moved expected growth of aluminum markets into positive territory.[2]

As a North American supplier, Alcoa will face increasing supply coming from China. Once China has completed its infrastructure projects, it will have huge excess capacity to produce and sell steel to countries like India and Brazil, key growth markets for Alcoa. Potential overproduction means potentially lower aluminum contract prices and lower profitability for Alcoa.

Despite its recent growth, Alcoa has dangerously low margins that cannot afford to fall further. Alcoa’s hefty labor expenses and cumbersome work force will make its plants more costly to run than its cheaper Chinese counterparts. The company’s future success hinges largely on the recovery in demand for US aluminum markets and its ability to cut costs while building international distribution networks. [3]

Company Overview

Alcoa makes a variety of products from upstream and downstream operations. Of the $21.0 billion that Alcoa generated in revenue in 2010, 50% was from sales in North America.[4] Alcoa is in the process of expanding its operations abroad, namely with its current projects in Jamalco and Alumar as well as with new investments in Australia, Brazil, China, Iceland, Guinea, Russia, and the Kingdom of Saudi Arabia.[4]

The company has expanded its downstream production through several acquisitions. Alcoa has increased its production of products like aluminum extrusions, engineered products, and aerospace products. Recent expansion includes the development of a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum industry.[4]

The company’s primary business sectors are:

  • Primary Metals and Alumina (33.8% of revenue)

Aluminum and aluminum based chemicals are produced from alumina, which is a powdery oxide of aluminum that is refined from bauxite ore. Alcoa is the world’s largest alumina producer, refining about $7.1 billion in market capitalization.[5]

  • Flat-Rolled Products (30%)

Alcoa is the world’s second largest producer of flat-rolled aluminum products with a 16% market share. The company is the leader in the United States with a 31% market share. Flat rolled products include aluminum sheet, tin and foil. 45% of flat-rolled products go to the canned beverage industry as rigid container sheet used to make cans. Other end markets for these products include the aerospace, automotive, and construction industries. Flat-rolled products typically make up $8 billion in revenue, representing about 30% of Alcoa’s earnings

  • Engineered Solutions (21.9%)

Alcoa makes both forged and extruding aluminum products that are used in the aerospace, automotive, commercial transport and industrial gas turbine markets. Several years earlier Alcoa made a timely move to refocus efforts on this division away from the struggling North American auto industry to more profitable sectors such as aerospace or industrial gas turbines.

Alcoa is also developing aluminum products to be used for oil exploration and extraction that are more versatile and faster to produce than traditional alternatives made from steel.[6]

  • Extruded and End Products (14.3%)

This sector produces both hard and soft alloy extrusions, architectural extrusions and vinyl siding. Over 50% of the products from this sector go to the building and construction markets. This sector has the lowest profit margins of the entire company and is currently being restructured by Alcoa to address this.

Business Financials

Quarterly and Annual Earnings

Q1 FY2011 Quarterly Earnings Summary

Alcoa announced a 20% increase in income from continuing operations for the first quarter of 2011 when compared to the fourth quarter of 2010.[7] Net income for the first quarter totaled $308 million, as compared to approximately $250 million for the final quarter of 2010.[7] These figures reflect the highest levels of quarterly incomes since the second quarter of 2008.[7] Revenues similarly increased for the quarter, totaling $6.0 billion - a 5% increase from the previous quarter and a 22% increase in year ago results.[7]

These gains were driven, primarily, by more favorable pricing for Alcoa's products and increasing demand for aluminum in target markets.[7] Demand for aluminum increased by 13% in 2010 and trends thus far show a 12% growth rate in 2011.[7] Third-party pricing increased by 7% for aluminum and 15% for alumina when compared to the previous quarter.[7] End markets, namely the automotive industry and commercial transportation, also showed growth for the quarter.[7]


FY2010 Annual Summary

Alcoa announces a net income of $258 million for the fourth quarter of 2010.[8] These earnings reflect Alcoa's highest growth since the third quarter of FY2008.[8] Revenue similarly increased to $5.7 billion, a 7 percent increase from the previous quarter and a 4 percent increase when compared to year-ago figures.[8] Alcoa finished the quarter off with a 13.8 percent margin for its business operations.[8]

Alcoa's annual earnings were similarly positive across the board. Alcoa announced revenue of $21.0 billion for FY2010, a 14 percent increase from FY2009.[8] Earnings and growth were driven primarily by higher prices in the aluminum market; these earnings were offset, however, by higher energy and material costs.[8]

Business Markets

Alcoa supplies several end markets with a wide variety of products. The following industries make up some of the more important markets.

Aerospace

Alcoa provides several products used in the manufacturing of aircraft which include airfoils for jet engines, alloys for the fuselage, wings, landing gear and wings. The upswing in this market due to increased production from both Boeing Company (BA) and Airbus (EADS) bode well for future sales. Alcoa is a large supplier to both companies and recently agreed on a $2 billion deal with Airbus. Alcoa is also focusing on research and development in an effort to decrease the weight and costs of its products in order to compete with the use of carbon alloys and other materials in planes.

Automotive

Alcoa provides several engineered automotive components such as wheels, suspensions and electronics as well as full vehicle body structures and advanced electrical systems. Because of an increased global emphasis on the weight reduction and fuel efficiency of automobiles, aluminum use in this sector has increased greatly over the past 15 years. However, recent struggles by the Big 3 Auto Woes, Ford Motor Company (F), General Motors (GM) and Daimler Chrysler (DCX) has caused them to both decrease auto production as well as decrease the use of aluminum as a manufacturing component in favor of cheaper steel. Because of this, Alcoa is aiming to expand its presence in China in order to take advantage of the growing market shares of Toyota Motor (TM), Nissan Motor (NSANY), Honda Motor Company (HMC) and Hyundai. Alcoa opened its first office in China in 1993 and currently operates 17 manufacturing facilities there.

Alumina

While the company is able to insulate its aluminum production from alumina market price fluctuations, Alcoa’s alumina sales are still subject to market rates. The price of alumina is related to the global refining capacity of alumina and global primary aluminum capacity. If global alumina refining capacity becomes much greater than primary aluminum production capacity, there could be an oversupply of alumina and a consequent drop in prices.

Primary Aluminum

Alcoa’s primary aluminum sale profit margins are affected by the company’s position on the metal’s production cost curve. Energy, transportation and raw material make up the main costs of primary aluminum production, a lower margin between these costs and the price of aluminum means lower profits. An ongoing concern for Alcoa has been the increasing price and growing scarcity of energy for its smelters in the United States. Drivers for primary aluminum prices include the global production capacity of the metal, as well as economic development. With new supply growth in China and elsewhere around the globe, the aluminum market may reach a surplus, putting downward pressure on prices. However, aluminum consumption in economically developed countries has proven to be sustainable for very long periods of time. As more countries, including China, become developed economies, aluminum demand will remain strong. Alcoa has a very positive outlook on the future of the aluminum industry, and therefore has ambitious expansion goals.

Trends and Forces

Increasing Energy Costs Threaten Alcoa's Profitability

The cost of aluminum production for Alcoa is relatively high because of the company's energy costs. To put this in perspective, energy costs represent 65% of Alcoa's refining costs and 70% of its smelting costs.

Alcoa supplies around 25% of its own energy, has another 25% of the supply linked to long term contracts and buys around 50% of the energy used by the company at spot energy prices. Because most of Alcoa's smelting operations are located in the United States, where energy prices are higher on average than elsewhere, Alcoa is at a cost disadvantage compared with other global aluminum producers. However, in spite of the high energy cost, Aloca smelting operations in the United States have an uninterrupted supply of energy.

To address this problem Alcoa opened a smelting facility in Iceland using geothermal energy, which is highly reliable, and for obvious reasons difficult to divert to other uses.

Increasing Chinese Demand Offers both New Market and Potential Competitor

China plays a large role in the global demand of both aluminum and alumina. The country's rapid economic growth has fueled the need for aluminum and has therefore increased demand for alumina. Because alumina production in China is costly due to high energy prices and low quality bauxite reserves, alumina imports have been very important. The world's spot alumina prices are therefore driven mainly by Chinese demand. An increase in Chinese domestic production of alumina could have a negative impact on alumina producers. While the country is the world's largest aluminum producer and a net exporter of the metal, cost pressures could change this and move the country back into a net importer position.

Cyclical Aluminum Sales Threaten Consistent Alcoa Sales

The aluminum industry is cyclical meaning that spot aluminum prices rise and fall due to speculation and supply imbalances. Alcoa in particular is exposed to these price fluctuations because 60% of the primary aluminum produced by the company is sold externally at these spot prices. A global oversupply of aluminum could hurt the company's profit margins as the spot price of aluminum would fall. Moreover, because the company is expanding its primary aluminum production, it is leaving itself even more exposed to aluminum price volatility.

Competition

Alcoa is a dominant player in the aluminum industry. Several new aluminum industry players have recently emerged in Russia, China, India and the Middle East. These companies have been gaining global market share. Alcoa's response to this has been an aggressive acquisitional business strategy. What separates Alcoa from the other major aluminum companies around the world is its integrated business strategy and ambitious plans for expansion.

One thing keeping Alcoa from improving its profit margins is the company's relatively high position on the aluminum production cost curve. Unlike Alcan, which has a very favorable cost position due to a technological production advantage and a reliance on cheaper energy sources, Alcoa is faced with production inefficiencies and high energy costs. Furthermore, Alcan is better positioned to absorb aluminum price fluctuations and is more internationally diversified, meaning that they make more sales outside of the United States than Alcoa does. This helps to explain why Alcan's stocks have recently outperformed Alcoa's.

Competitors are mostly interested in the profit they make, as long as it is more than Alcoa's. Because Alcoa is a dominant player in the aluminum industry other companies have to compete with them in order to succeed. They, like Alcoa, are very conservation oriented.

Reference

  1. 1.0 1.1 AA Google Finance Profile
  2. [http://www.livemint.com/2010/04/14230446/Outlook-for-aluminium-producer.html Outlook for Aluminum Producers Improves
  3. Aluminum Demand
  4. 4.0 4.1 4.2 Alcoa Annual Report
  5. [http://www.wikinvest.com/stock/Alcoa_%28AA%29/Data/Market_Capitalization Alcoa Market Capitalization
  6. stock:Alcoa_(AA)/Filing/10-Q/2008/F1914607 Alcoa Q2 2008 10-Q Filings
  7. 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Alcoa Reports Q1 Earnings
  8. 8.0 8.1 8.2 8.3 8.4 8.5 Alcoa Ends 2010 with Strong Fourth Quarter Results
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