Alcoa Inc. (AA, Financial), a $19.24 billion market cap company, is one of the world's largest producers of aluminum.
Aerospace and Auto Industry
This integrated producer company focuses on several end markets, including packaging, automobiles, aircraft, and construction.
Airline fundamentals are improving with a projected air travel demand rising roughly 10% in the aerospace market.
Additionally, Alcoa is focusing in the auto industry, where vehicle sales are higher than before. Aluminum represents the second largest-volume component material in automotive vehicles and is expected to double by 2025.
Strategic Acquisitions
Due to a joint venture with the Ma'aden mining company, Alcoa could reach the lowest cost in aluminum production. The deal will generate savings, as energy represents about one third of Alcoa's aluminum production costs.
Last January the company agreed to purchase Firth Rixson, a global leader in aerospace jet engine components. This transaction will further reduce the firm's reliance on market prices for aluminum.
Revenues, Margins and Profitability
Looking at profitability, revenues grew by 8.22% compared to last year. This year, Wall Street expects an improvement in earnings ($0.82 versus -$2.15).
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| Ticker | Company | ROE (%) |
| AA | Alcoa | -18.93 |
| ATI | Allegheny Technologies Inc | 5.32 |
| CENX | Century Aluminum Co | 4.09 |
| Â | Industry Median | -8.55 |
The company has a current ROE of negative 18.93% which is lower than the one exhibit by Allegheny Technologies (ATI, Financial) and Century Aluminum (CENX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment.Â
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 1.56x, which indicates a premium versus the industry average of 1.23x while the price-to-sales ratio of 0.8x is far below the industry average.
The next chart shows an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $14.244, which represents a 7.4% compound annual growth rate (CAGR).
Hedge fund gurus like Ken Heebner (Trades, Portfolio), Steven Romick (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as First Pacific Advisors (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
