Why Alcoa Inc Is Actually Starting to Turn Around

Alcoa’s earnings surged past Wall Street’s expectations as its key investments are paying off.

Apr 10, 2014 at 9:55AM


Earlier this week Alcoa (NYSE:AA) reported first-quarter results that surged past analysts' expectations. After stripping out special items the company earned $0.09 per share, which was nearly twice the $0.05 per share analysts expected the company to earn. It was a sign that the company was actually starting to turn around as investments at its higher-margin businesses are really paying off.

Shifting gears
CEO Klaus Kleinfeld was quoted in the company's earnings press release saying that Alcoa's "transformation is accelerating." Specifically he noted that the company was "powering growth in our value-add business and aggressively reshaping our commodity business." That transformation is having dramatic results.

While the company took $276 million in special items on the quarter, those charges were largely related to reducing the capacity of its commodity-based smelter and rolling mills. In fact, since 2007 Alcoa has reduced smelting capacity by 28%. That said, while the company has reduced its investments in its commodity-related segment, it has shifted those investments to grow its value-add segments.

One of the segments receiving investment dollars is its automotive business segment. These investments are paying off as the company saw record auto revenue in the first quarter. That revenue is only expected to keep growing as the company commissioned its new $300 million Davenport, Iowa, automotive expansion, which will supply aluminum sheet products to the automotive industry.

Looking ahead Alcoa sees overall demand for aluminum in vehicles to nearly double by 2025, while the amount of aluminum body-sheet content is expected to quadruple by 2015 and increase tenfold by 2025. This is because automakers like Ford (NYSE:F) are increasing the amount of aluminum in order to bring down vehicle weight. Ford's 2015 F-150, for example, will be 700 pounds lighter thanks to extensive usage of aluminum. That weight reduction is critical to improving the fuel efficiency and performance of Ford's next generation F-150. Because of demand growth from companies like Ford, Alcoa's auto sheet sales are expected to surge from $330 million this year to $1.3 billion by 2018.


Photo credit: Ford Motor Company 

A growing value-add portfolio
Last year Alcoa produced $13.1 billion in revenue from its value-add segments. That revenue is only expected to grow in the future. While the automotive segment will be a big driver, it's just one of four segments Alcoa sees driving revenue growth. As the following slide shows, aerospace, commercial transportation, and packaging will all enjoy single-digit compound annual growth through the next few years.

Alcoa Value Add

Source: Alcoa Investor Presentation (link opens a PDF

Aerospace is particularly exciting given the 7.5% compound annual growth Alcoa sees that segment delivering over the next few years. Its balanced portfolio of innovative fastening systems, high performance engine investment castings, and advanced aerospace structures has the company well positioned to capture the growth in aerospace.

In addition to aerospace, Alcoa is literally reinventing the wheel for its commercial trucking customers. Its new Ultra ONE wheel is 47% lighter than the average steel wheel and 18% lighter than the average aluminum wheel while still being 17% stronger. It will help rigs save 1,400 pounds, which will enhance fuel efficiency as well as enable rigs to increase the payload. Best of all, replacing 18 steel wheels will reduce the carbon dioxide emissions of a rig to the point where it can offset the annual carbon footprint of an average family of four. In addition to the Ultra ONE, Alcoa's Dura-Bright EVO wheel is another important innovation. It never loses it shine as it is a 10x improvement in corrosion resistance. Needless to say, these innovations will be driving Alcoa's transportation segment for years to come.

Investor takeaway
Given aluminum's strength and its lightweight properties it looks like the perfect metal to lighten everything from vehicles to aircraft in order to increase performance and fuel efficiency. The company's focus on investing in its value-add segments that take advantage of aluminum is really beginning to pay off as the company is starting to deliver stronger profits. Because of that, Alcoa's business really looks like it's heading in the right direction.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. While both Ford and Alcoa are good stocks, The Motley Fool's chief investment officer has another stock in mind for his No. 1 stock for 2014. And it just might be one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Matt DiLallo has the following options: long January 2016 $10 calls on Ford. The Motley Fool recommends Ford. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers