Alcoa: Commodity Volatilty But Plenty Of Upside

| About: Alcoa, Inc. (AA)

Summary

Alcoa shares have taken a beating of late.

However, the company split is still on track.

As well, there's an activist involved that will be pushing to unlock more value after the break up.

Alcoa (NYSE:AA) investors have experienced the ups and downs of the commodities industry firsthand. And even though the company's per-share price has fallen dramatically over the past year, there are many reasons for investors to believe Alcoa shares will bounce back sooner rather than later.

Let's not forget that Elliott Management went activist in November. The activist investor's thesis is that the market is undervaluing Alcoa's manufacturing business because of the metal price decline. The activist investor has been talking with the company about the spinoff and other options for boosting value. The big idea is that after the split, Elliott wants to see Alcoa sell off its power generation assets. Beyond just the catalyst of a spinoff and potential asset sales, there are other reasons to be bullish.

First There's Demand

Aerospace companies always need lightweight metals, and the increasing demand for these materials could drive Alcoa's per-share price in the near future. Boeing (BAE) increased its deliveries last year, which helped the plane manufacturer soar past original expectations. Furthermore, Airbus Group SE exceeded its own 2015 target.

Both Boeing and Airbus are Alcoa customers, which may have led the lightweight metals supplier to increase its global aerospace sales projections for this year. Alcoa said it anticipates these sales to rise from 8% to 9% based on the "continued robust demand for large commercial aircraft and jet engines."

GE Aviation Partnership A Key

As if Boeing and Airbus weren't enough, Alcoa this month announced a partnership with GE Aviation that could be worth more than $1.5 billion. Under the terms of the agreement, Alcoa will supply advanced nickel-based superalloy, titanium and aluminum components for a wide range of GE Aviation engine programs, according to Alcoa.

The Alcoa-GE Aviation contract represents one of several recent partnerships for Alcoa as well. Alcoa has secured approximately $9 billion in aerospace supply contracts over the past year, including this transaction. Meanwhile, these contracts could help Alcoa further enhance its position in the global aerospace market and boost its per-share price going forward.

Automotive Business Growing

The automotive sector currently serves as a pivotal segment for Alcoa, a trend that looks likely to continue in 2016.

Alcoa reported its shipments of aluminum automotive sheet grew 18% last year. Plus, the company's recently expanded Alcoa, Tennessee factory plans to provide aluminum sheet to automakers such as Ford (NYSE:F), Fiat Chrysler Automobiles (NYSE:FCAU) and General Motors (NYSE:GM).

Alcoa is projecting aluminum sheet content per vehicle to rise rapidly over the next few years, too. In fact, the company has estimated that aluminum auto sheet demand will reach 1 million metric tons by 2025.

Bottom Line

Alcoa investors who have been patient with the company should stay the course. By doing so, these investors may be able to benefit from the growth of Alcoa's aerospace and automotive sheet businesses. As these businesses grow, Alcoa shareholders should expect to see the company's per-share price rise accordingly.

Disclosure: I am/we are long AA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.