Why You Should Hold on to This Low-Risk Aluminum Producer

Acceleration in Constellium’s high-margin Airware products should drive the company's margins higher.

Jun 3, 2014 at 8:57AM

Constellium (NYSE:CSTM) is the best company for exposure to increasing aluminum usage in light vehicles and aircraft. The company reported adjusted first quarter EBITDA of €63 million, below the consensus of €70 million. The company reported headline EBITDA of €71 million included the impact of metal price lag (€2 million), restructuring cost (€3 million), and start-up cost (€3 million). 

This earnings miss did not warrant the negative reaction as one-time events like adverse weather and production issues adversely affected the company's first-quarter results. The results would have been better than the consensus estimates if not for the equipment outage at Ravenswood. Operational issues at the company's Ravenswood facility caused a five-day production loss; however, the company has since resolved the issue and it will have no effect on its second-quarter results. Furthermore, despite the earnings miss, long-term growth drivers, including auto sheet demand growth, Airware volumes, and packaging growth in Europe remain in place.

Aerospace and transportation
A temporary equipment outage affected the aerospace and transportation segment, as this limited shipments. In addition, the company had to use express freight more extensively due to demand and bad weather. Higher aluminum premiums and less favorable hedged rates on the U.S. dollar also affected its quarterly results.

Although the company fully hedges its exposure to LME aluminum prices, premium pass-through has a different structure. Of the premium, 70% is passed through immediately, 20% lags by a quarter, and Constellium consumes the remaining 10%. There should not be any further headwinds if premiums do not change; however, a decline in premiums will create a tailwind for Constellium.

Going forward, aerospace-sector demand should remain strong with backlogs at aircraft original equipment manufacturers, or OEMs, such as Boeing (NYSE:BA) and Airbus (NASDAQOTH:EADSY) at all-time highs. Alcoa (NYSE:AA), the largest U.S. based aluminum producer, also expects the aerospace sector to register strong growth. Alcoa recently increased its 2014 growth estimate for the aerospace sector to 8%-9% from 7%-8% previously. 

New body-in-white mill
The company's packaging and automotive rolled products segment results, on the other hand, reflected the positive effect of the shift in the product mix toward automotive products. Finally, the automotive structures and industry segment results reflected strong automotive demand and the company's exit from the soft alloys market in France.

As the company builds its new body-in-white, or BIW, mill in the U.S. with European BIW facility expansion planned by 2016, demand for BIW remains a strong stock driver. Constellium is expanding its capacity in Europe by 140,000 tons to 200,000 tons, of which it expects to commission 40,000 by the end of 2014. The U.S. BIW joint venture with Japan's UACJ will be located in Bowling Green, Kentucky with an initial target capacity of 100,000 tons. Moreover, the facility design will support further expansion. The company plans to invest approximately $150 million total in both projects. The company expects to begin production in the first half of 2016 and reach full capacity by 2018. 

Laurent Musy, President of Constellium's packaging and automotive rolled products business unit, said, "Bowling Green is the right place for this plant, particularly because its central location will allow us to serve automotive OEMs across the US with our advanced and innovative range of products." 

BIW products already account for a significant portion of EBITDA for the packaging and automotive rolled products segment. While investors have begun to appreciate developments in the BIW market, the rising penetration of aluminum extrusions in automotive crash management systems is another strength for Constellium. Constellium expects automotive crash management systems, primarily comprised of aluminum extrusions, to grow at a CAGR of 11% for the rest of this decade. This strong growth trend has also been demonstrated in Kaiser Aluminum's recent quarterly results. 

High-margin Airware products
On the other hand, acceleration in the company's highest-margin Airware products should further drive the company's aerospace margins over the coming years. Constellium's new Airware aluminum-lithium product will remain instrumental in helping aerospace OEMs achieve weight reductions. Constellium has witnessed stronger-than-expected demand for Airware, which has prompted the company to build two additional cast houses to accelerate production. Constellium expects aerospace aluminum demand to grow at a CAGR of 8% over the next several years.

Bottom line
Operational issues in the company's Ravenswood facility had a negative impact on its results and more than offset the stronger-than-expected results in the company's automotive business. However, this does not alter the positive story. Constellium provides investors with attractive exposure to the growing aerospace and automotive markets. While aluminum prices have been weak over the past couple of years, Constellium has minimal commodity price exposure since the majority of the company's product sales have commodity price pass-throughs or are hedged against commodity price volatility. 

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Jan-e- Alam has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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