Auto and truck manufacturers are searching for ways to lighten their vehicles, hoping to improve performance and boost fuel economy. That's good news for aluminum producer Alcoa (NYSE: AA ) and carbon-fiber composite developer Hexcel Corporation (NYSE: HXL ) , which can offer automakers sufficiently strong and lighter weight product. But traditional suppliers, like steel producer United States Steel (NYSE: X ) , refuse to give up market share easily. They are developing their own less weighty alternative. Which company will win in the transition to lighter weight vehicles?
Aluminum leading the change
Auto giant Ford made headlines when it announced that the next generation Ford F-150 pickup truck would be mostly aluminum. While using the advanced material reduces truck weight by about 700 pounds and thus greatly improves fuel economy, making such a significant change to the nation's most popular vehicle is a bold step. The car and truck maker apparently believes aluminum's advantages are worth the risk of a customer backlash. Furthering the metal's leading position in lightweight vehicles, Ford also introduced an aluminum-intensive concept version of its Fusion automobile. The potential car of the future comes in nearly 25% lighter than a standard steel-based model.
Aluminum is also gaining in large commercial vehicles. Leading aluminum producer Alcoa has developed the world's lightest heavy-duty truck wheel. This innovation, called the Ultra ONE, allows large-truck fleets to increase payloads and gain fuel efficiency. The new wheel, which is 47% lighter than traditional steel, helps boost truck profitability by saving up to 1,400 pounds per rig.
Alcoa aims to take full advantage of aluminum's success in transportation. The company is transitioning from a commodity-based supplier to a value-added product producer. Its $300 million auto product plant expansion in Iowa and doubling of wheel production in Hungary, while closing an Australian can sheet rolling mill and continually reducing smelting capacity, seem to show where the company believes its future lies.
Investors appear to appreciate Alcoa's strategy. The company's stock is up about 40% over the last six months and has jumped nearly 70% over the past two years. Though still down roughly 18% from a 5-year high achieved in 2011, gaining greater auto industry market share could help Alcoa test that share price historical peak.
Composites on the horizon
If the airline industry is any guide, aluminum may be facing some competition, however. Boeing's latest 787 airliner is made of mostly composite materials, a significant change from earlier aluminum-heavy plane designs. The 787 body, nearly 50% comprised of carbon fiber reinforced plastic and other composites, delivers a nearly 20% weight savings when compared to more conventional aluminum construction.
Composites are also making their way into on-road vehicles. Luxury automaker BMW's i3 electric car is a leader in using composite carbon fiber. While no other carmaker has embraced the advanced material as aggressively as BMW, rivals like Audi have mixed and matched aluminum and carbon fiber and Ford utilizes composites in certain areas of its lightweight concept car.
Hexcel Corporation would certainly profit from increased composite use in vehicles. Hexcel, a world leader in carbon fiber for commercial and defense aircraft, has benefited greatly from the aerospace composite boom. Latest quarterly sales grew nearly 11% year-over-year and earnings per share jumped 16%. Since the company supplies both leading aircraft makers, Boeing and Airbus, its increasing backlog suggests strong sales growth should continue in coming years.
Wall Street appears well aware of Hexcel's optimistic future. The company's shares are near a 52-week high and are up nearly 60% over the last two years. With aerospace gains possibly fully factored in, a new catalyst, like meaningful vehicle construction opportunities, may be what's needed to propel Hexcel stock to a higher plateau.
Where does that leave steel?
Steel producers appear severely threatened by advanced material incursion into car and truck manufacturing. But they are fighting back. United States Steel has invested $400 million in a joint venture with Japan's Kobe Steel to develop a lighter high-strength alternative to aluminum or carbon fiber. This improved metal may help enhance steel's current advantages. High-volume automobile manufacturers can't help but notice aluminum 's comparatively higher price and composites are even more expensive. Higher repair and insurance costs for advanced material-based vehicles also tend to guide car makers toward steel.
U.S. Steel has a lot at stake in the lightweight vehicle transition. Flat-rolled steel, an automotive industry staple, made up 67% of company sales and 33% of income last year. In its latest quarter, U.S. Steel reported a profit of $52 million compared to an adjusted net loss of $51 million a year earlier, mainly due to healthy flat-rolled demand. The product's pricing strength, aided by vibrant auto and construction markets, helped the business segment deliver an $85 million quarterly profit even as shipments were stymied by a harsh winter.
Strong auto industry demand has helped U.S. Steel shares climb over 25% in the past two years, but investors seem understandably skittish about the company's future. Worries about advanced material gains have likely contributed to the stock's 10% decline over the last six months. For shares to advance further, it would appear critical that U.S. Steel at least hold its vehicle market share.
As automakers look to produce lighter weight vehicles, traditional suppliers like U.S. Steel could face increasing competition from aluminum producers like Alcoa and composite makers like Hexcel. While aluminum appears the material of choice currently, composites like carbon fiber or improved lightweight steel cannot be ruled out as viable alternatives in a lighter vehicle future. Which company will profit most from this car and truck transition? It's not clear at the moment, but investors may want to watch developments closely. Gains and losses for those involved in the transformation could be significant.
Do you know this energy tax "loophole"?
You already know record oil and natural gas 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.