The New 2015 Ford F-150 Is a Game Changer, but Alcoa Is the Real Winner

The lightweight 2015 Ford F-150 is could change the pickup market due to its superior fuel efficiency. However, Ford may not be the biggest winner in the scenario.

Jan 22, 2014 at 9:59AM

Ford Motor's (NYSE:F) radically redesigned 2015 Ford F-150 pickup was the talk of the Detroit Auto Show last week. The F-150 is the best-selling vehicle in America, so every new version is bound to attract attention. However, this time Ford went for broke with a body that is 97% aluminum (the frame is still made of high-strength steel). This helped Ford cut the truck's weight by 700 pounds, boosting its fuel efficiency.


The 2015 Ford F-150 sheds 700 pounds by using an aluminum body (Photo: Ford)

Ford hopes that the new F-150's improvements in fuel efficiency and performance will help it gain share in the lucrative pickup market. Yet the real winner in this massive redesign may be aluminum giant Alcoa (NYSE:AA). Alcoa will be one of Ford's top suppliers for the 2015 Ford F-150, and it will be a long-term beneficiary of growth in the auto industry's aluminum usage.

Retooling the business
Unlike most companies, Alcoa has had a rocky recovery since the Great Recession. Historically, the company has been heavily dependent on global aluminum prices. Unfortunately, after spiking from 2009 to early 2011, aluminum prices have dropped by a third, and Alcoa stock tumbled in sync with the aluminum spot price.

Aluminum LME Spot Price Chart

Alcoa vs. Aluminum LME Spot Price, data by YCharts

Today, Alcoa is investing heavily to diversify its business beyond aluminum mining, refining, and smelting into "value-add" businesses. In other words, it is looking to sell aluminum-based products rather than aluminum itself. CEO Klaus Kleinfeld recently noted that value-add businesses now make up 57% of Alcoa's revenue and 80% of its segment profit.

Alcoa plans to continue driving growth in the value-add businesses in order to boost profitability and limit its exposure to global aluminum prices. One of its biggest opportunities is the auto industry. Automakers expect to double their usage of aluminum by 2025, and Alcoa is investing $670 million in factories that will build aluminum parts for the auto industry.

A big trade-off
By using aluminum to cut the 2015 Ford F-150's weight by nearly 15%, Ford will be able to deliver a significant improvement in fuel economy. A general industry rule of thumb is that a 10% reduction in vehicle weight boosts fuel efficiency by 7%.

In addition, with a lighter truck, Ford will be able to offer buyers more hauling and towing capacity with smaller, more fuel-efficient engines. In fact, the biggest F-150 engine -- a 6.2-liter V8 -- isn't being offered on the 2015 Ford F-150 (at least for now).

Ford executives are hoping that superior fuel efficiency will help boost Ford's pickup market share through conquest sales. Nevertheless, the move to aluminum is quite risky. Aside from the potential hesitations of some buyers to buy an aluminum-body truck, the switch from steel to aluminum will add about $1000 in cost for the 2015 Ford F-150. Ford wants to keep the new F-150's price competitive, which means that it will have to "eat" much or all of this added cost.

The real winner
If Ford has to accept a lower margin on the new F-150 to maintain truck buyers' interest, it will need significant market share gains to move the profit needle. Yet while the new model could be a home run, there's also a real risk that the 2015 Ford F-150 launch will be underwhelming, as has been the case with General Motors' recent truck launch.

By contrast, Ford's F-150 redesign provides pure upside for Alcoa. The increased use of aluminum in the auto sector will (in a small way) reduce the global aluminum glut, helping to stabilize aluminum prices. Even more importantly, Alcoa's position as a key supplier for the 2015 Ford F-150 will allow it to grow its lucrative automotive "value-add" business regardless of the new model's profit margin for Ford.

Foolish bottom line
The 2015 Ford F-150 could represent a quantum leap within the pickup segment, offering best-in-class fuel economy by a wide margin without sacrificing performance. However, the cost side of the equation is a big question mark for Ford. The company has already tempered investors' profit expectations for 2014, and the new F-150 could potentially take a couple of years to really pay off in the form of higher market share.

As a result, aluminum supplier Alcoa may be the best investment play on the new F-150. Alcoa is one of Ford's key partners for the aluminum body, and this gives it almost guaranteed growth as Ford's new pickups go into production.

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Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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