Alcoa, Inc. (NYSE:AA) is back on track after experiencing a huge decline in the past two years. The demand and the price of aluminum, nickel, and titanium, which are used in automobiles, aircraft, commercial transportation, construction of buildings, oil and gas, packaging, defense, and industrial applications are stabilizing. Alcoa's portfolio is predicted to capitalize on the demand, as its recent results illustrate that trend. All of Alcoa's business segments have generated strong growth in the first quarter of 2014. Sequentially, the global-rolled products segment tripled, with a strong demand for auto sheet and industrial transportation products. The engineered products and solutions segment have posted a record after-tax operating income of $189 million, driven by commercial transportation and aerospace, and after-tax operating income of alumina segment increased by 59% on a year-after- year basis. Finally, its primary metals segment managed to reduce its loss compared to the past quarter.
On a consolidated basis, Alcoa generated a net income of $0.09 per share, excluding certain items related to the restructuring charges. Its value-add businesses have generated 76% of the segment profits in Q1 of 2014, driven by record engineered products and solutions. Global-rolled products added a three-fold sequential increase in the profitability, and alumina posted its best quarterly results since 2011. Alcoa's strategy involves optimizing its rolling mill portfolio, while introducing innovative products and investing in high-value expansions.
Going forward, the company is expecting a strong demand from the end-markets. In the aerospace segment, Alcoa is expecting 8-9% growth for this year on the back of strong performance from large commercial aircraft. Airbus and Boeing's order backlogs reached an eight year-high of 10,675 aircraft units. In the automotive segment, the company is expecting 3-5% growth in the United States of America, 1-4% growth in Europe, and 6-10% growth in China. The company is seeing 2014 as a pivotal year for automotive aluminum, and by 2025, Alcoa predicts that more than 75% of pickup trucks and 20% of large sedans and SUVs produced in North America will be aluminum-bodied. Looking at the strong demand for heavy trailers and trucks, the company is increasing its production by 5-9%. Beverage can and packaging markets are also growing modestly in America and Europe, while China is expected to grow by 10%. Building and commercial markets are also gradually growing with the healing economy.
Ability to Capitalize on the Demand
Alcoa is well set to capitalize on the demand from the aerospace, automotive, packaging, building, and commercial markets. On the aerospace side, its portfolio consists of three main components: advanced aerospace structures, engine and engine investment castings, and fastening systems. Alcoa is a global leader in the engine applications and airframes markets. It recently announced $25 million for the expansion of aerospace capabilities in Virginia to grab on demand for next-generation aircraft engine parts.
In the commercial transportation market, the company is focusing on producing innovative wheels. Recently, it introduced the world's lightest heavy-duty truck wheel, and announced the expansion of Dura-Bright surface-treated wheels. These portfolio enhancements are likely to bring $1.2 billion incremental revenue growth by the end of 2016. In the automotive market, it announced $300 million in investments for the expansion of its Davenport, Iowa facility. It is also making progress on the automotive expansion at Alcoa, Tennessee. There is high capacity in Tennessee, and the Iowa facilities will grow auto sheet revenues by six-fold to $1.3 billion by the end of 2018. These investments and the focus on enlarging its facilities are setting its foothold to grab onto the emerging demand coming from the automotive market all around the world. To improve its global-rolled products revenue, it is looking to invest $40 million to enlarge the production of specialty foils for flexible packaging and aseptic.
Potential Risks to the Alcoa Business Model
Before coming to any conclusions, it is wise to consider potential risks associated with any investment. In the case of Alcoa, its business model mainly depends on the demand and price of aluminum. However, its business structure is diversified and does not depend on any single sector, which reduces uncertainties. Alcoa has had strong market shares in various sectors where it sells its aluminum products, including aerospace and defense, automotive, commercial transportation, and commercial and residential buildings. In addition, with the increasing demand for alumina products, the price of aluminum has been stabilizing over the past few quarters, and the outlook is even better. Demand from the end-markets, including aerospace and defense, automotive, commercial transportation, and commercial and residential buildings sectors, is increasing, which is strengthening the price of aluminum. In terms of liquidity, the company seems to have lower risk, as it has been generating sufficient cash flows to support capital investments.
Alcoa is on track to generate big profits in the coming days with strong demand arising from the end-markets. The company is expanding its production and facilities to grab onto the emerging demand. Its focus on portfolio transformation and restructuring will save money, allow it to enhance operational efficiencies, and focus on more emerging demands from the aerospace and automotive sectors. In addition to the good news, its share price is on a surge, and has gained more than 72% in the past year alone. Furthermore, the company's exceptionally high forward price-to-earnings ratio is 19, and the strong demands emerging from the end-markets presents a rosy picture for the future, as the company is already setting it up for that with recent investments.
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