Looking back on the day Alcoa (NYSE:AA) was dropped from the Dow Jones Industrial Average (DJINDICES:^DJI) -- September 10, 2013 -- many thought the underperfoming aluminum giant wasn't representative of the direction the U.S. economy was headed. Boy, were they wrong. Since that date, Alcoa closed out 2013 on a tear -- up 31.5% -- versus the Dow Jones Industrial Average, which was only up 10%.
Just a few weeks prior to this announcement, I argued on CNBC Asia's Squawk Box that Alcoa was primed to be a perfect proxy given its exposure to the automotive, aerospace and beverage industries. At the time, Alcoa was undergoing a fairly substantial restructuring that was absolutely needed to optimize the company's competitiveness and capitalize on growth opportunities. Alcoa's CEO, Klaus Kleinfeld, deserves a lot of credit because the decisions he and his team made were not easy. In fact, Alcoa was one of the few companies in its industry that chose to head in this direction. As time has elapse, it is becoming more readily apparent that Kleinfeld's actions reestablished the company as a worthwhile investment.
Paying the cost to be the boss
Throughout 2013, restructuring costs littered Alcoa's financial statements, dragging down generally positive, financial results. Through the first nine months of 2013, Alcoa charged off $402 million in "Restructuring and other charges" versus only $27 million for the same period in 2012. Despite this, the company was able to spin a profit of $54 million as opposed to a $51 million loss in 2012.
Much of this restructuring allotment stems from plant closures in Alcoa's upstream business which had been suffering due to overcapacity and pricing weakness in the aluminum industry. Now that these plants have been taken offline, margins and utilization should remain stable, if not improve. Based on global trends in key sectors, and Alcoa's streamlined business, investors who stuck it out through the beginning of 2013 or made the contrarian bet later in the year have been handsomely rewarded and appear ready to continue to do so.
Keep a watchful eye on...
Given Alcoa's line of business, it is highly dependent on the growth prospects of myriad other industries. Several global sectors have helped turn the tide in 2013, including: aerospace, automotive, and commercial building & construction. Based on third quarter presentation materials, management expects the "Aerospace" segment will contribute 9-10% sales growth in 2013 over 2012. This is closely followed by the "Commercial Building & Construction" market which is likely to have grown by 4-5% and "Automotive" by 1-4%, all in terms of Alcoa's sales to those respective areas.
These highly visible industries are easy for investors to keep up with as most auto manufacturers publish monthly sales data, and the Airbus-Boeing (NYSE:BA) rivalry attracts its fair share of news. Conversely, if you are an investor in either of these industries, paying attention to Alcoa's forecasts can prove beneficial as well, given that raw material demand is often a precursor for end-market growth.
The unofficial, unofficial start to earnings season
This Thursday, Alcoa will announce its full-year results for its 2013 fiscal year. I am personally heading into this report with a bullish stance. Data from most major end users has continued to impress, and the majority of restructuring is now in the rear view mirror. Aside from expecting positive financial news, I'm interested to find out how several of its growth projects are coming along, most notably its three-headed attack focused on "Aluminum Intensive Vehicle" growth. The three projects include two plant expansions and one joint venture in Saudi Arabia. If all lights are green, Alcoa could continue to lead the aluminum industry pack.
Why is Alcoa gearing up for greater automotive demand?