Bullish on Alcoa Following Restructuring Announcement

Alcoa (AA) is one of the companies I keep my eye on. As a former employee in their Corporate Information Technology area, I know the company and the culture from the inside out. So much, that in the past, I would have had a very difficult time writing this piece. And would have never been endorsing the company and the stock. Today is a new day.

The announcement of restructuring will be a breath of fresh air for this company. While Alcoa has made incredible strides in cutting costs, they have not necessarily made it to the bottom line and the corporate culture has suffered. A prime example is the Reynolds acquisition. Thought to be a savior, it was little more than disruptive and distracting. Few have addressed or acknowledged the disruption. Alcoa is not a consumer company, they are a manufacturing company. The announced restructuring comes clean and is a step to getting back to core business.

This restructuring targets:

• Reynolds Business - the makers of Reynolds Wrap
• Flexible Packaging Businesses - the makers of many shaped and sized containers and storage bags for food packaging
• Closures Business - the makers bottle caps in all shapes and sizes

While each has been good from a revenue standpoint, they are problematic from a growth standpoint. While Reynolds Wrap has become a generic, like Kleenex, you have to ask yourself, how many rolls of aluminum foil do you buy each year? And is the Reynolds brand or a generic brand? How many brands of freezer bags and aluminum pie tins are there in the grocery aisle – some made by Alcoa. While Alcoa provides bottle caps for the likes of Coke (KO) or Pepsi (PEP), the drink market is not where the growth is for KO and PEP, they are growing other places. So, how will the bottle cap business grow? In each case the businesses targeted are somewhat stagnant businesses for growth. And businesses that will continue to be under pressure to deliver higher quality for less money.

The stock has not moved much off the news. Many speculate about the involvement of activist investors and potential takeover prospects. Selling off the slower growing segments is the right thing for shareholders. It allows the management to focus on what they do well, which is make aluminum and related products. In the long term, whether at the end of a acquisition story or by purely becoming a better business, this news is a BUY signal for AA.

Disclosure: none