Alcoa (AA, Financial) expects demand for aluminum to grow only by 6.5% in 2015 as compared to a robust 9% in 2014. These trends suggest that things aren’t going to be as easy as it were in the past. This was clearly reflected in its first-quarterly results that were considerably down sequentially.
Looking past the weak performance
Alcoa reported revenue of $5.8 billion in the first-quarter 2015. The revenue was down about 9% from $6.4 billion in the fourth-quarter and 6% as compared to $6.2 billion in the third-quarter 2014 respectively. Also, its earnings of $0.28 per share in the first-quarter 2015 were below the level of $0.33 earnings per share in the fourth-quarter and $0.31 earnings per share in the third-quarter 2014 correspondingly.
Moreover, its revenue fell short of the consensus estimates of $5.94 billion for the first-quarter 2015. However, its earnings were little better than analysts’ estimates of $0.26 per share for the quarter.
End-market weakness to consider
So, the investors have to watch the stock more carefully going forward. The aluminium prices have taken a downward shape in fiscal 2015. This is due to the reflection of iron ore and steel prices that have fallen to their lowest levels since 2009. Aluminium prices are directly proportionate to iron ore and steel prices and further reduction in these prices will lead to a decrease in the aluminium prices as well this year.
However, all is not bad for Alcoa. The company is making various transformations across the board that should help the company stay tall amid this fluctuation in the aluminium industry. It is closinh high-cost plants and leveraging its expertise in Ă‚ red-hot markets such as aerospace, tech and automobile. These markets do offer plenty of upside growth for Alcoa in the future.
Bright spots
The company expects its aerospace sales to grow in the range of 9% to 10% in fiscal 2015. Also, automobile sales are forecast to grow by 2% to 4% while commercial building and construction will accelerate 5% to 7% this year. This is good organic growth for the aluminium producers.
Alcoa is making various acquisitions. It has recently acquired Tital and Firth Rixson. The company will be in a better position to tap the growing demand in the aerospace sector with this acquisition. This acquisition will also assist Alcoa casting the titanium and aluminium structure in Europe. Also, its recent decision to acquire RTI International Metals will strengthen its position in the mid- and downstream markets. The company plans to close this acquisition within five months.
The company recently announced that it will be stopping smelting at its Brazilian plant and selling of its aluminium assets. This decision should help the company improve its bottom line performance as the Brazilian facility wasn’t cost-effective. This capacity had about 1.4 million tons of smelting capacity since 2007 and has idled a further 740,000 tons.
Conclusion
The stock seems to be sharing cheap valuation. It trades at the forward P/E of 11.02, which is below the trailing P/E of 64.05. It has PEG ratio of 1.11 that continues to support its earnings growth in the future. However, its profit and operating profit margins are not so attractive. It has profit and operating profit margins of 2.64% and 11.18% respectively for the past 12 months. Moreover, the company has huge debt of $8.82 billion and cash of $1.19 billion. It has operating cash flow of $2.05 billion and levered free cash flow of $797.38 million. Investors are advised to watch the market trends and make investments accordingly.
