Alcoa (AA) recently announced strong second quarter earnings as increasing demand across all industry segments drove a 27% year over year and 11% sequentially increase in revenues to $6.585 billion while earnings per share grew to $0.32 before special items.
Despite the recent global slowdown, aluminum demand remains strong, growing at 12% with the potential to double by 2020. Demand is being driven by a mix of new and existing products, increasing aluminum mainstream penetration.
Automobile demand remains strong despite the slowdown in production following the disaster in Japan. As fuel economy is set to rise well into the next decade aluminum demand will increase as automobile manufacturers replace steel with aluminum.
Alcoa announced on June 9 the development of new aluminum-based solutions for the aerospace market, reducing the weight and an increase in fuel economy on top of the savings from new engines. Maintenance and manufacturing costs make the new material much cheaper over the life cycle when compared against carbon fiber. As a sign of support, Airbus signed a deal worth an estimated $1 billion to provide the new composite for use in planes.
At the Paris Air Show, Boeing and Airbus signed a combined $94 billion in new order volume, providing both companies with a backlog of over 7.5 years of current production. Aluminum is a major component in airplane manufacturing and the backlog indicates strong demand well into the future for Alcoa.
On May 9 Alcoa announced that it will begin selling an aluminum building panel that will remove smog from the air in a major green initiative. The panel works by turning fine grounds of titanium dioxide into a clear paste which it then applies to the surface of aluminum. The titanium dioxide interacts with sunlight and breaks down pollution into carbon dioxide particles.
There are two main reasons for investors to take a look at Alcoa. The first is that Alcoa has not been burdened with the problems plaguing many commodity stocks. It did not declare force majeure on contracts due to major storms nor did it suffer any major operational issues or face threats by foreign government to seize its mines.
The second has to do with aluminum itself, which is benefiting from the substitution effect. Automakers and airline manufacturers are quickly turning to aluminum as it provides a lightweight, durable and cost effective alternative to steel and carbon fiber.
Investors looking for a commodity stock with a bright future would be advised to take a long look at Alcoa’s strong future.
Disclosure: I am long AA.
Additional disclosure: Source: Alcoa's website.