Investors interested in the aluminum industry have looked closely as Alcoa (NYSE:AA) has rebounded in 2014, returning to its best levels in more than three years and demonstrating its ability to restructure itself in light of the changing needs of its primary customers. Yet even though shareholders have been happy with Alcoa's performance, the company nevertheless still faces a tough environment in which success is anything but assured. Let's look at three of the biggest things that could trip up Alcoa going forward and what the company would have to do to avoid them.
1. If the F-150 fails to break out, then it could crush a key aspect of Alcoa's future.
Last week, Ford (NYSE:F) announced that it had begun to produce its new 2015 aluminum-body F-150 trucks. The long-anticipated model could revolutionize the industry, as its more extensive use of aluminum rather than steel has taken as much as 700 pounds off its total weight. Ford has used a special high-grade aluminum alloy to help improve fuel efficiency without reducing its performance, and the implications for Alcoa and other aluminum producers are huge if the rollout is successful. With fuel-efficiency standards remaining a constant challenge for the industry, greater use of lighter-weight metals like aluminum could be the answer to automakers' needs and help support Alcoa's long-term growth plans in the auto sector.
The concern, though, is that truck buyers might not appreciate a lighter-weight truck. With gas prices having fallen recently, worries about fuel efficiency are fading into the background, and the popular perception of aluminum as far weaker than steel and other heavier metals poses a threat to the truck's marketability. Ford has gone on the offensive to demonstrate its ruggedness and handling, but a lot depends on the biases of would-be truck owners and their willingness to embrace an aluminum-made truck.
So far, the F-150 looks like it could be a resounding success. More than 225,000 potential customers have signed up to receive updates on the new truck model as it rolls out, and 250,000 more have used Ford's website to choose customized features for an F-150 to meet their individual needs. Nevertheless, if early adopters prove uninspired by the new F-150's performance, then it could deal a crushing blow not just to Ford's sales but also to Alcoa's
2. Higher expectations could be tough for Alcoa to meet.
Alcoa's stock has climbed in light of the successes from its recent restructuring moves, and it's apparent that the strategy has paid off for the company. Yet in some ways, Alcoa stock could prove to be a casualty of the company's success, as investors have dramatically raised their expectations for the aluminum giant's future prospects. In the current quarter, analysts now expect Alcoa to earn a third more than they thought it would just two months ago, and a similar 30% rise in full-year 2014 expectations has Alcoa facing a much higher bar to satisfy growth-hungry investors. Hopes also remain high for 2015, with growth rates of nearly 25% in earnings per share as the current benchmark for success.
Alcoa has done a good job of meeting and surpassing expectations, beating consensus estimates in all of the first three quarters of 2014. As comparisons become more difficult, though, Alcoa could find it harder to sustain its impressive growth rate, and that in itself could prove to be the driver that sends Alcoa shares downward, at least for a while.
3. Aluminum recycling has proven to be a tricky business.
Aluminum recycling efforts have been in place for decades, and even before deposit laws in many states offered refunds to those who recycle, the financial incentive from recycling aluminum was enough to lead many consumers to visit recycling facilities with their used cans. Alcoa has sought to make recycling an even larger part of the industry, but resistance from major beverage makers in the soft-drink and beer industries has made it tough for aluminum producers to encourage recycling to the maximum extent possible.
For instance, a recent report showed the efforts of recycling giant Novelis to develop a can using 90% recycled aluminum. Despite assertions of high quality, Novelis has had trouble getting major players like Coca-Cola (NYSE:KO), PepsiCo (NASDAQ:PEP), and Anheuser-Busch InBev (NYSE:BUD) to use them, according to reports from the Guardian.
For Alcoa, that news has mixed implications. On one hand, Alcoa's vertically integrated approach gives it access to materials to produce new aluminum, making recycling a less critical element of its business than it is for Novelis. Yet Alcoa also benefits from recycling efforts and has made them part of its sustainability plan, and so resistance to recycling is contrary in some ways to the company's mission.
From the broadest perspective, Alcoa hasn't shown any signs of falling back from its recent rise just yet. Nevertheless, Alcoa will have to address these and other challenges if it wants to stay successful and reward its long-term shareholders with further gains.
Dan Caplinger owns shares of Ford. The Motley Fool recommends Coca-Cola, Ford, and PepsiCo. The Motley Fool owns shares of Ford and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.