Kaiser Aluminum Offers Potential Upside

| About: Kaiser Aluminum (KALU)

Summary

Kaiser Aluminum had a steady run last year gaining more than 16%.

The stock, however, has struggled so far this year amid market gyrations.

The company recently announced decent Q4 results.

Strong and stable demand for automotive extrusions and highly-engineered aerospace solutions should drive growth looking forward.

Semi-fabricated specialty aluminum producer, Kaiser Aluminum (NASDAQ:KALU) had a reasonably good run last year. While major metal and mining companies ended with huge losses amid tumult in the commodities market, KALU was one of the few standout stocks, gaining more than 16%.

This year, however, KALU has been off to a bad start. The stock is down about 9%, year-to-date amid large-scale gyrations in the equity markets. Also some sell-off was sparked after the company reported that it swung to a loss, on GAAP basis, in the fourth quarter due to a big one-time charge.

In my opinion, however, KALU's recent slide offers a good buying opportunity. The stock trading at around $76 offers some upside potential once the market sentiment improves.

My positive outlook is based on the company's consistently strong performance in two of its four business areas; highly-engineered aerospace solutions and high-strength customized automobile products. More importantly, the outlook for these products is also robust. That is important because it helps the company to offset the weakness in two other business areas; custom industrial and general engineering. The glut in the aluminum market and cheap imports has been a drag on financials for some of the leading US aluminum leaders like KALU and Alcoa (NYSE:AA) (Read my previous articles on Alcoa on the cheap imports issue). Cheap imports have hurt the demand for low-end aluminum products in the recent past.

That is why KALU's value-added revenue from high-end products becomes a key growth driver. And the company has been delivering in this area.

In the fiscal year 2015, KALU, posted a record $790 million in value added revenue, an increase of 8%, year-over-year. The improvement was largely due to higher shipments of automotive extrusions and heat treat plates. Increased demand for these products also bolstered its sales-margins. And more importantly, the demand for these products is expected to remain robust in the near-future as well, thanks mainly to production ramp up of Ford's (NYSE:F) aluminum bodied F-150 pickup trucks amid very strong demand. In the current year, KALU expects growth of around 10% in value-added revenue from automotive extrusions.

Likewise, the company also stands to gain from strong demand for its highly-engineered aerospace solutions. Fiscal year 2015 marked the sixth successive year when orders for commercial aerospace products surpassed builds. In 2016, the company expects approximately 5% growth in value added revenue from aerospace solutions.

The results in the fourth quarter might disconcert investors. As the company looked to de-stock higher-than-expected year-end supply chain in long products from aerospace solutions and high-strength applications, its value-added revenue and shipments were lower-than-anticipated. However, its outlook for the current year is positive as orders pattern is back to normal.

Besides, the company has made some crucial investments in the recent past, which would not only allow to ramp up the production for its automotive extrusions but also boost overall efficiency due to equipment upgrades.

Moving on to its financial position, a glance through the company's balance sheet shows that its liquidity position is sound and the debt ratio is also acceptable. During fiscal year 2015, cash flows from operations funded several capital investments which included $63 million expenditure towards capacity expansion for automated extrusions.

Shares repurchase and quarterly dividend payments amounted to about $77 million during the year, which were also funded through normal operations.

That said, investors need to keep in my mind that revenue from other two areas; customs industrial and general engineering is expected to remain flat in the foreseeable future. So, the top-line growth will be under slight pressure.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.