Alcoa (AA, Financial) is growing and its transformational efforts in the past are paying off for it; the results are evident from a strong operational and financial performance in the recently reported quarter. The company is pleased to see strong growth momentum of 19th consecutive quarter of year-over-year profit growth. For the upcoming fiscal year, Alcoa is confident of delivering solid results. With a laser focus on profitable sites and acquisitions lined up in the future, Alcoa seems well positioned to hold a profitable edge in the market. Let us have an insight to this.
Promising times ahead
The aluminum market looks promising. In fact the company is also seeing good growth opportunities in many segments. There is growing demand for aluminum. Alcoa has already announced its breakthrough new materials for the automotive segment. The exciting and attractive feature of this new material is that it is 30% stronger and 30% lighter than steel. This is giving good competition to the high-strength steel as the customers now are demanding more for aluminum than high strength steel which is further expected to ramp up, giving better growth opportunities in the automotive segment.
Moving ahead, the analysts are expecting gas prices to come down further. This can be a great opportunity for Alcoa as it is shifting consumer preference. This lower gas price will ramp up the sale of bigger vehicles and the sales of light duty and heavy duty trucks. In addition, Alcoa is also planning to expand its multi-material product portfolio with acquisition and smart investments. Under its acquisition strategy, Alcoa has seen solid synergies in the past that are still helping it to grow. Firth Rixson seems to be a wise move that contributed $1.6 billion to its revenue. Further with the TITAL acquisition, Alcoa is looking for good synergies in the titanium segment also.
Growth drivers
Alcoa is seeing bright opportunities in fan blade for power engines. Moreover, Alcoa’s aluminum lithium fan blade for Pratt $ Whitney Pure Power engine for A320 Neo has been certified, which is a great step and can ramp the demand in the future. Similarly, the company with the expansion of The Hampton/La Porte has now good access to the jet engine space where it can also accelerate the opportunities in hand. There are solid growth opportunities in these segments also as Alcoa excels in making more aerodynamic or structural castings which can serve the large engines.
Like this, Alcoa is stretching its opportunities in some of the potential markets such as aerospace, automotive, heavy duty trucks, building and construction. Alcoa also enjoys a healthy attractive pipeline of products which it is now trying to improve with a number of innovations. The main focus of the company revolves around increasing its competitiveness in the commodity business which is also a part of Alcoa’s mitigation strategy towards downside risk. It is planning to maintain a low-cost position which can also help it to remain profitable even in the soft market conditions.
Conclusion
Now moving to the fundamentals of the stocks, the stock looks expensive with a trailing P/E of 70.43. Even the earnings growth is not complimenting which is evident by a forward P/E of just 10.96. The company is showing weak valuation now yet the long-term prospects of the company look strong. But the stock can be a strong long-term holding as its earnings are growing at a CAGR of 36.48%, which is less than the industry average of 19.87%. As of now, the investors should wait for the stock to show more concrete signs of gaining market share. But investors seeking long-term benefits can surely pick Alcoa.
