Alcoa, Inc. (NYSE: AA) (from ALuminum Company Of America) is the world's third largest producer of aluminum, behind Rio Tinto Alcan and Rusal.[4] From its operational headquarters in Pittsburgh, Pennsylvania, Alcoa conducts operations in 31 countries. Alcoa is a world leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its active and growing participation in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling. Aluminum and alumina represent more than three-fourths of Alcoa’s revenue. Non-aluminum products include precision castings and aerospace and industrial fasteners. Alcoa’s products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial applications.
In May 2007 Alcoa made a $27 billion hostile takeover bid for Alcan, a former subsidiary, aiming to unite the two companies and form the world's largest aluminum producer. The takeover bid was withdrawn after Alcan announced a friendly takeover by Rio Tinto in July 2007.
Among Alcoa's other businesses are fastening systems, building products (Kawneer) and Howmet Castings.[5] The sale of the packaging unit was announced on December 21, 2007[6] and closed in the first quarter of 2008.

Alcoa is the world's leading producer and manager of primary aluminum, fabricated aluminum, and aluminum facilities, with a revenue of $18.4 billion in FY 2009.[1] [2] Revenue in 2009 reflects a 32% decrease from the $26.9 billion generated in revenues in FY 2008.[3]

Alcoa’s 2008-2009 decline was largely due to falling Aluminum prices, which fell to $1,100 per tonne. Fall 2009 aluminum prices have recovered to $1,900 per tonne. Klaus Kleinfeld, CEO of Alcoa, views aluminum’s partial recovery as part of a slow rebound for Alcoa. Despite its primarily American operations, Alcoa is a strongly international company with operations in 44 countries. It is banking on an aluminum recovery in Brazil, China and India to balance faltering domestic markets. [4]

Alcoa’s core business is largely dependent on world aluminum markets. World production of Aluminum in 2009 has fallen 8.3% since 2008, and Alcoa believes demand will falter 5.5% during the year. Fall 2009 aluminum demand is being propped up by the Chinese government’s stimulus, which has singlehandedly moved expected growth of aluminum markets into positive territory. North American markets are not so lucky. The Aluminum Association estimates that the apparent supply of aluminum in the United States will fall 20% in 2009.[5]

Contents
1 Company Overview
1.1 Business Financials
1.2 Quarterly and Annual Earnings
1.2.1 Q4 FY2010 and FY2010 Annual Summary
1.2.2 Q3 FY2010 Summary
1.2.3 Q1 FY2010 Summary
1.2.4 FY2009 Annual Summary
1.2.5 FY2008 Annual Summary
1.2.6 FY2007 Annual Summary
2 Business Markets
2.1 Aerospace
2.2 Automotive
2.3 Alumina
2.4 Primary Aluminum
3 Trends and Forces
3.1 Increasing Energy Costs Threaten Alcoa's Profitability
3.2 Increasing Chinese Demand Offers both New Market and Potential Competitor
3.3 Cyclical Aluminum Sales Threaten Consistent Alcoa Sales
4 Competition
5 References
Alcoa, as a North American supplier will face increasing oversupply problems from the Chinese market. Fall’s 30% increase in Aluminum prices is not sustainable, as China has a finite number of stimulus projects which require metals. Once China has completed its infrastructure projects, it will have huge excess capacity to produce and sell steel to countries like India and Brazil, key growth markets for Alcoa. Citing Chinese overproduction, Deutsche Bank predicts that there will be a 1.75 million metric ton surplus throughout 2009. Overproduction means lower aluminum contract prices and lower profitability for Alcoa.

Nevertheless, Alcoa's Fall 2009 earnings managed to substantially beat Wall Street expectations for the first time in 5 quarters. Analysts expected Alcoa’s Fall 2009 earnings to be negative ten cents, but the company turned a profit of four cents per share largely due to its heavy lay-offs and aluminum buying action in China, India and Brazil. The cash for clunkers program and Boeing’s new plane (Dreamliner 787) also boosted domestic demand for aluminum. Alcoa’s average take for a ton of steel increase 18% due to this price appreciation. [6]

Despite a good quarter and increasing steel prices, Alcoa has dangerously low margins that cannot afford to fall further. Alcoa’s hefty labor expenses and cumbersome work force will make its plants more costly to run than its cheaper Chinese counterparts. The company’s future success hinges largely on the recovery in demand for US aluminum markets and its ability to cut costs while building international distribution networks. [7]

Company Overview

Alcoa makes variety of products out of upstream and downstream businesses. Of the $18.5 billion that Alcoa generated in revenue in 2009, 52% was from sales in North America.[2] Alcoa is in the process of expanding its operations abroad, namely with its current projects in Jamalco and Alumar as well as with new investments in Australia, Brazil, China, Iceland, Guinea, Russia, and the Kingdom of Saudi Arabia.[2]

The company has expanded its downstream production through several acquisitions. Alcoa has increased its production of several products like aluminum extrusions, engineered products, and aerospace products. Recent expansion includes the development of a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum industry.[2]

2009 annual sales declined from all time highs in 2007 and 2008 of $30.7 billion and $26.9 billion respectively, to $18.5 billion.[2] Challenges in 2009, which are expected to continue in 2010, are higher energy costs, decreased demand for aluminum and alumina production in North America and Europe, a declining U.S. automotive industry, and delays in the Boeing 787 and Airbus 380. High growth in emerging markets, especially China and Russia, should continue to more than offset minimal growth in Europe and decline in America.


The company’s primary business sectors are:

Primary Metals and Alumina (26% of revenue)
Aluminum and aluminum based chemicals are produced from alumina, which is a powdery oxide of aluminum that is refined from bauxite ore. Alcoa is the world’s largest alumina producer, refining about $7.47 billion in market capitalization.[8] In 2008, $4.1 million was generated through the sale of primary aluminum. 2009 figures, however, represent a 35% decrease from the previous year mostly as a result of decreased demand.[2]

Flat-Rolled Products (27%)
Alcoa is the world’s second largest producer of flat-rolled aluminum products with a 16% market share. The company is the leader in the United States with a 31% market share. Flat rolled products include aluminum sheet, tin and foil. 45% of flat-rolled products go to the canned beverage industry as rigid container sheet used to make cans. Other end markets for these products include the aerospace, automotive, and construction industries. Flat-rolled products typically make up $8 billion in revenue, representing about 10% of Alcoa’s earnings

Engineered Solutions (19%)
Alcoa makes both forged and extruding aluminum products that are used in the aerospace, automotive, commercial transport and industrial gas turbine markets. Several years earlier Alcoa made a timely move to refocus efforts on this division away from the struggling North American auto industry to more profitable sectors such as aerospace or industrial gas turbines. This can be seen by the fact that automotive products represented 40% of this division's revenue in 2003, but only 20% by 2008.

Alcoa is also developing aluminum products to be used for oil exploration and extraction that are more versatile and faster to produce than traditional alternatives made from steel.[9]

Extruded and End Products (16%)
This sector produces both hard and soft alloy extrusions, architectural extrusions and vinyl siding. Over 50% of the products from this sector go to the building and construction markets. This sector has the lowest profit margins of the entire company and is currently being restructured by Alcoa to address this.

Business Financials


Alcoa is less profitable than sector, industry and market benchmarks.[10]


Alcoa is less profitable than sector, industry and market benchmarks.[11]
Alcoa’s profitability ratios stack up poorly compared to competitors, especially within the aluminum sector. Lower margins due to excessive competition in the North American Markets and collapsing durable demand have led Alcoa to a 5 year negative earnings growth rate. Specifically, Alcoa’s earnings have been falling at over 25% per year as factory utilization has collapsed. [12]

Because Alcoa has not yet liquidated many of its aluminum production facilities, it maintains a relatively large amount of book value relative to its price. The famous Fama French study found that “Value” companies defined as having a low price per book value historically strongly outperform those with a high price to book ratio. When conditions return to normality, value companies tend to outperform their peers because of their substantial untapped capacity.[12]

From a valuation perspective as of Fall 2009, Alcoa is relatively cheaper than its competitors with a similar level of indebtedness seen by its current ratio and also a similar dividend yield. Macro-economically speaking, one will notice that major market players are not particularly bullish on the aluminum industry. Notice that the Price:Sales for the entire metals industry is about 6-7 times higher than the aluminum sector in particular.

If Aluminum production resurges due to any number of factors including its high usage in alternative energy, production or hybrid vehicles or demand in emerging markets, Alcoa’s financial ratios suggest that the company’s equity value will benefit immensely more than its peers. [12]

Quarterly and Annual Earnings
Q4 FY2010 and FY2010 Annual Summary
Alcoa announces a net income of $258 million for the fourth quarter of 2010.[13] These earnings reflect Alcoa's highest growth since the third quarter of FY2008.[13] Revenue similarly increased to $5.7 billion, a 7 percent increase from the previous quarter and a 4 percent increase when compared to year-ago figures.[13] Alcoa finished the quarter off with a 13.8 percent margin for its business operations.[13]

Alcoa's annual earnings were similarly positive across the board. Alcoa announced revenue of $21.0 billion for FY2010, a 14 percent increase from FY2009.[13] Earnings and growth were driven primarily by higher prices in the aluminum market; these earnings were offset, however, by higher energy and material costs.[13]

Q3 FY2010 Summary
Alcoa announced losses in income for the third quarter of 2010, both when compared to previous quarter earnings as well as year-ago results.[14] Q3 income was $61 million, as compared to $73 million for Q3 FY2009 and $137 million for the second quarter of FY2010.[14] Losses were driven primarily by falling steel prices, namely in lower London Metal Exchange (LME) prices.[14]

Revenue, however, increased from $5.2 billion in the previous quarter to $5.3 billion. Revenue also increased by 15% when compared to Q3 FY2009 figures.[14] These increases were driven by higher sales volumes and shipping volumes.[14] The primary metals and flat-rolled products saw decreases in their quarterly incomes as segment prices fell.[14]

Q1 FY2010 Summary
Alcoa announced a loss of $194 million from continuing operations that is explained in part by a $295 million restructuring plan enacted in this quarter.[15] Despite losses, continuing operations figures increased as compared to both the previous quarter, which posted a loss of $266 million, and the first quarter of 2009, which posted a loss of $480 million.[15] These improvements were driven by increased prices for alumina and aluminum sales.[15]

Alcoa posted revenues of $4.9 billion for Q1 FY2010, a 10% drop from the previous quarter.[15] Despite losses in revenue, business segment income was up for alumina, primary metals and engineered products and solutions.[15] Alumina posted income of $72 million, an increase from $19 million in Q4 FY2009.[15] Primary metals generated $123 million, as compared to losses of $143 million the previous quarter.[15] Income from engineered products and solutions increased by 42% for the quarter, reaching $81 million.[15]

FY2009 Annual Summary
Alcoa announced an 18% increase in revenues for the fourth quarter of the 2009 fiscal year, culminating at $5.4 billion.[16] Alcoa posted $1.1 billion in cash from operations for the final quarter of 2009, with a free cash flow of $761 million-- the first positive posting since the second quarter of the 2008 fiscal year when the impacts of the economic downturn first began..[16] Excluding $266 million in charges for restructuring and special items, Alcoa posted its second consecutive profitable quarter.[16] The improvement in free cash flow is a $947 million increase from Q3 FY2009 driven by the fourth quarter's cash from operations.[16] Losses in continuing operations and net income, however, were driven by crashing prices and demand for aluminum.[16]

FY2008 Annual Summary
Alcoa posted revenues of $26.9 billion in FY2008, an 8% decrease from the previous year where revenues totaled $29.3 billion.[3] Such financials keep Alcoa as the world's largest producer of aluminum.[3] Driving these revenues were a 92% loss in income from continuing operations, from $2.8 billion in FY 2007 to $229 million in FY 2008.[3] Net income per common share similarly fell by 103%, in both basic and diluted terms.[3] However, despite these losses, the number of shareholders in 2008 increased by 25%.[3]

FY2007 Annual Summary
Alcoa posted revenues of $30.7 billion in FY2007, marking a 1% from the previous year and showing consistency with FY2006 sales of $30.4 billion.[17] Income from continuing operations saw a 19% increase in 2007 from 2006, increasing from $2.1 billion in FY2006 to $2.5 billion in FY2007.[17] Assets similarly increased in 2007, jumping from $37.2 billion in 2006 to $38.8 billion in 2007, a 4% increase.[17] Despite these gains across the board, the number of shareholders fell by 6% in 2007, dropping from 248,000 to 233,000.[17]

Business Markets

Alcoa’s supplies several end markets with a wide variety of products. The following industries make up some of the more important markets.

Aerospace
Alcoa provides several products used in the manufacturing of aircraft which include airfoils for jet engines, alloys for the fuselage, wings, landing gear and wings. The upswing in this market due to increased production from both Boeing Company (BA) and Airbus (EADS) bode well for future sales. Alcoa is a large supplier to both companies and recently agreed on a $2 billion deal with Airbus. Alcoa is also focusing on research and development in an effort to decrease the weight and costs of its products in order to compete with the use of carbon alloys and other materials in planes.

Automotive
Alcoa provides several engineered automotive components such as wheels, suspensions and electronics as well as full vehicle body structures and advanced electrical systems. Because of an increased global emphasis on the weight reduction and fuel efficiency of automobiles, aluminum use in this sector has increased greatly over the past 15 years. This trend will continue in Europe as automakers aggresively reduce weight further to meet the strict Euro5, which come into force in 2009. However, recent struggles by the Big 3 Auto Woes, Ford Motor Company (F), General Motors (GM) and Daimler Chrysler (DCX) has caused them to both decrease auto production as well as decrease the use of aluminum as a manufacturing component in favor of cheaper steel. Because of this, Alcoa is aiming to expand its presence in China in order to take advantage of the growing market shares of Toyota Motor (TM), Nissan Motor (NSANY), Honda Motor Company (HMC) and Hyundai. Alcoa opened its first office in China in 1993 and currently operates 17 manufacturing facilities there.

Alumina
55% of Alcoa’s in-house alumina supply in 2006 was sold under contract to third parties. While the company is able to insulate its aluminum production from alumina market price fluctuations, Alcoa’s alumina sales are still subject to market rates. The price of alumina is related to the global refining capacity of alumina and global primary aluminum capacity. If global alumina refining capacity becomes much greater than primary aluminum production capacity, there could be an oversupply of alumina and a consequent drop in prices. Lower production in China and Russia and difficulty in exporting out of Indonesia led to hikes in prices in the third quarter of 2007, good news for Alcoa.

Primary Aluminum
Alcoa’s primary aluminum sale profit margins are affected by the company’s position on the metal’s production cost curve. Energy, transportation and raw material make up the main costs of primary aluminum production, a lower margin between these costs and the price of aluminum means lower profits. An ongoing concern for Alcoa has been the increasing price and growing scarcity of energy for its smelters in the United States. In 2005, margins experienced a sharp drop before normalizing again the following year. Drivers for primary aluminum prices include the global production capacity of the metal, as well as economic development. With new supply growth in China and elsewhere around the globe, the aluminum market may reach a surplus, putting downward pressure on prices. However, aluminum consumption in economically developed countries has proven to be sustainable for very long periods of time. As more countries, including China, become developed economies, aluminum demand will remain strong. Alcoa has a very positive outlook on the future of the aluminum industry, and therefore has ambitious expansion goals.

Trends and Forces

Increasing Energy Costs Threaten Alcoa's Profitability
The cost of aluminum production for Alcoa is relatively high because of the company's energy costs. To put this in perspective, energy costs represent 65% of Alcoa's refining costs and 70% of its smelting costs. In early 2008 Alcoa paid between 35% and 80% more for energy (depending on the facility) than a year earlier.[9]

Alcoa supplies around 25% of its own energy, has another 25% of the supply linked to long term contracts and buys around 50% of the energy used by the company at spot energy prices. Because most of Alcoa's smelting operations are located in the United States, where energy prices are higher on average than elsewhere, Alcoa is at a cost disadvantage compared with other global aluminum producers. However, in spite of the high energy cost, Aloca smelting operations in the United States have an uninterrupted supply of energy.

To address this problem Alcoa opened a smelting facility in Iceland using geothermal energy, which is highly reliable, and for obvious reasons difficult to divert to other uses. As of July 2008, Alcoa is negotiating with the governments of Iceland and Greenland to open additional facilities of similar design.

Increasing Chinese Demand Offers both New Market and Potential Competitor
China plays a large role in the global demand of both aluminum and alumina. The country's rapid economic growth has fueled the need for aluminum and has therefore increased demand for alumina. Because alumina production in China is costly due to high energy prices and low quality bauxite reserves, alumina imports have been very important. The world's spot alumina prices are therefore driven mainly by Chinese demand. An increase in Chinese domestic production of alumina could have a negative impact on alumina producers. While the country is the world's largest aluminum producer and a net exporter of the metal, cost pressures could change this and move the country back into a net importer position. Many analysts expect China will likely be a net aluminum importer by the end of 2008.[18] Countries that remain developed for longer have a sustained and increased demand for aluminum, so China's developing economy is expected to maintain its current demand levels. Alcoa forecasts a 9% annualized increase in China's aluminum consumption for the next decade.[9]

Cyclical Aluminum Sales Threaten Consistent Alcoa Sales
The aluminum industry is cyclical meaning that spot aluminum prices rise and fall due to speculation and supply imbalances. Alcoa in particular is exposed to these price fluctuations because 60% of the primary aluminum produced by the company is sold externally at these spot prices. A global oversupply of aluminum could hurt the company's profit margins as the spot price of aluminum would fall. Moreover, because the company is expanding its primary aluminum production, it is leaving itself even more exposed to aluminum price volatility.

Competition

Alcoa is a dominant player in the aluminum industry. Several new aluminum industry players have recently emerged in Russia, China, India and the Middle East. These companies have been gaining global market share. Alcoa's response to this has been an aggressive acquisitional business strategy. What separates Alcoa from the other major aluminum companies around the world is its integrated business strategy and ambitious plans for expansion.

One thing keeping Alcoa from improving its profit margins is the company's relatively high position on the aluminum production cost curve. Unlike Alcan, which has a very favorable cost position due to a technological production advantage and a reliance on cheaper energy sources, Alcoa is faced with production inefficiencies and high energy costs. Furthermore, Alcan is better positioned to absorb aluminum price fluctuations and is more internationally diversified, meaning that they make more sales outside of the United States than Alcoa does. This helps to explain why Alcan's stocks have recently outperformed Alcoa's.


Latest Full Context Quarter Ending Date
2010/09

Gross Profit Margin
15.6%

EBIT Margin
1.5%

EBITDA Margin
10.1%

Pre-Tax Profit Margin
-0.9%

Interest Coverage
0.6

Current Ratio
1.4

Quick Ratio
0.7

Leverage Ratio
2.9

Receivables Turnover
8.9

Inventory Turnover
7.1

Asset Turnover
0.5

Revenue to Assets
0.5

Return on Invested Capital
-0.8%

Return on Assets
-0.4%

Debt/Common Equity Ratio
0.68

Price/Book Ratio (Price/Equity)
1.34

Book Value per Share
$13.02

Total Debt/ Equity
0.70

Long-Term Debt to Total Capital
0.40

SG&A as % of Revenue
4.7%

R&D as % of Revenue
0.8%

Receivables per Day Sales
$39.72

Days CGS in Inventory
51

Working Capital per Share
$1.80

Cash per Share
$0.83

Cash Flow per Share
$1.25

Free Cash Flow per Share
$2.34

Tangible Book Value per Share
$8.00

Price/Cash Flow Ratio
13.9

Price/Free Cash Flow Ratio
7.4

Price/Tangible Book Ratio
2.18

Most recent data

5-Year Averages
Return on Equity
7.2%

Return on Assets
2.6%

Return on Invested Capital
4.7%

Gross Profit Margin
18.7%

Pre-Tax Profit Margin
6.9%

Post-Tax Profit Margin
4.0%

Net Profit Margin (Total Operations)
3.2%

R&D as a % of Sales
0.8%

SG&A as a % of Sales
4.8%

Debt/Equity Ratio
0.52

Total Debt/Equity Ratio
0.62

Most recent data
 
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