Equity Research

Equity Research } ALCOA [NYSE:AA] }

Published: Sept 10, 2013.

Year founded: 1988

Business areas: Primary Aluminum, Fabricated Aluminum, Bauxite, Refining of Alumina.

Employees: 61000 (aprox.)


  2011 2010 2009
Sales $24,951 $21,013 $18,493
Income(Loss) $615 $262 $(985)
Dividends 0.12 0.12 0.26
Total Assets $40,120 $39,293 $38,472
Cash Flow $2,193 $2,261 $1,365
Book Value / Share $12.96 $13.26 $12.70
Capital Expenditures $1,287 $1,015 $1,617
Employees 61,000 59,000 59,000
Earnings/Share 0.57 0.24 -1.13


Key Strengths:

Alcoa is the third largest producer of Aluminum in the world. Alcoa has increased its revenue by 19% primarily from or- ganic growth in its key markets – aerospace, automative, consumer electronics, packaging, commercial transportation, building and construction, and industrial. The rising cost of fuel is one major factor driving aircraft manufacturers to dramatically reduce the weight of their planes, and the lightweight material of choice remains aluminum. Innovations from Alcoa’s downstream manufacturing businesses also play a vital role in improving aircraft eciencies. For instance, Alcoa’s Power and Propulsion business produces advanced cooling designs and thermal coatings that allow jet engine original equipment manufacturers (OEMs) to in- crease turbine operating temperatures, reduce weight and emissions, and improve eciencies, while avoiding poten- tial durability issues from these harsher operating conditions. Alcoa is also driving a greater use of aluminum in the global ground transportation and automotive industries as they seek fuel cost savings and reduced emissions from weight re- duction. Since 1990, the increased use of aluminum in the world’s vehicle fleet has avoided putting one billion tons of greenhouse gas (GHG) emissions into the atmosphere and saved more than 84 billion liters of gasoline – results wel- comed by regulators, manufacturers, and consumers alike. AA’s strategy for the fast-growing consumer electronics mar- ket is to capitalize on aluminum’s light weight, durability, heat conductivity, and limitless surface finishes. To build on the life-cycle benefits of aluminum, we took a minority share in Electronic Recyclers International (ERI), the largest U.S. recycler of electronics waste. This partnership allows Alcoa to bring its expertise in recycling to the growing chal- lenge of e-waste and to enhance the role aluminum plays in making electronics more sustainable. With a growing world population, increased urbanization, and higher demand for lightweight and recyclable products, it is expected that de- mand for aluminum will double between 2010 and 2020. Al- coa is a global company operating in 31 countries. Based upon the country where the point of sale occurred, the U.S. and Europe generated 49% and 27%, respectively, of Alcoa’s sales in 2011.


Risk Factors:

Alcoa’s business, financial condition or results of operations may be impacted by a number of risk factors including global economic conditions. Volatility persists in Europe; politi- cal uncertainty could stall the U.S. recovery; and there is a possibility that the meteoric pace of economic growth in China may slow. Yet the long-term trends are very favor- able to our businesses. A reduction in demand (or a lack of increased demand) for aluminum by China, Europe or a combined number of other countries may negatively impact Alcoa’s results. Alcoa could be materially adversely a↵ected by declines in aluminum prices. Alcoa’s operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted. Al- coa’s profitability could be adversely a↵ected by increases in the cost of raw materials or by significant lag e↵ects for decreases in commodity or LME-linked costs. Alcoa is ex- posed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which it operates. Joint ventures and other strategic alliances may not be successful. Alcoa faces signifi- cant competition. Failure to maintain investment grade credit ratings could limit Alcoa’s ability to obtain future financing, increase its borrowing costs, adversely a↵ect the market price of its existing securities, or otherwise impair its business, fi- nancial condition and results of operations. Currently, Alcoa’s long-term debt is rated BBB- with stable outlook by Standard and Poor’s Ratings Services; BAA3 with stable out- look by Moody’s Investors Services; and BBB- with stable outlook by Fitch Ratings. Alcoa’s global operations are ex- posed to political and economic risks, commercial instabil- ity and events beyond its control in the countries in which it operates. Alcoa’s human resource talent pool may not be adequate to support the company’s growth. Alcoa may not be able to successfully develop and implement technology initiatives. In the past Alcoa has successfully defended legal lawsuits. Figure 1 shows the stock performance graph of Al- coa. It is evident from graph that stock price dropped down by more than 50% in 2008 and since that time company is trying to recover its stock price.

Horizontal Analysis (analysis over time):

Alcoa’s net revenue was $24.9 billion at the end of fiscal year 2011 as compared to $21 billion in 2010. There is a growth trend observed in revenue since 2010 after deep decline in 2009.

Alcoa’s gross profit was $4.4 billion in the end of fiscal year 2011 as compared to $3.8 billion in 2010. There is a growth pattern observed in gross profit since 2010 after a deep de- cline in 2009.

Alcoa’s net income was negative $341 million in the end of fiscal year 2011 as compared to positive $671 million in 2010.

Alcoa’s net profit from continuing operations were $808 mil- lion which is increased by roughly 50% compared to $404 million in 2010.

Alcoa’s net cash from operations were $2.1 billion in the end of fiscal year 2011 as compared to $2.2 billion in 2010. A growth pattern in net cash from operations is observed from 2009 to 2010 and then it is slightly downward from 2010 to 2011. However net cash equivalents at the end of year are on increasing curve from 2009. It was $1.4 billion in 2009, $1.5 billion in 2010, $1.9 billion in 2011.

Alcoa’s total assets were $40 billion at end of fiscal year 2011 as compared to $39 billion in 2010. There is an upward trend observed in total assets from 2009 to 2011. The percentage increase in the total assets was almost same stable at 2% in 2011 and 2010 from previous year.

Alcoa’s total liabilities are almost same and stable roughly at $22 billion since 2009.


Vertical Analysis (common-size analysis):

Alcoa’s total revenue grew by 19% in 2011 as compared to 14% in 2010 after a decrease of 31% in 2009.

Alcoa’s gross profit grew by 5% in 2011 as compared to 2% in 2010 after a loss of 5% in 2009.

Alcoa’s interest expanses are increased to $524 million in 2012 as compared to $494 million in 2010 and $470 million in 2009. Interest expanses are increased by 6% in 2011 as compared to 5% in 2010 from previous year.

Alcoa’s income tax expanses are increased to $255 million in 2011 as compared to $148 million in 2010. Income tax increased by 71% in 2011 while taxes decreased by 70% in 2010 from previous year.


Alcoa’s cash shortfall after paying debts, expanding capac- ity and taxed is on decreasing trend. It was negative $224 million in 2011 as compared to negative $744 million. Cash shortfall was observed on downward trend by 69% in 2011 and 50% in 2010 from previous year. However there was cash surplus after paying debt principal, taxes of $1, 068 mil- lion in the end of fiscal year 2011, $245 in 2010. It increased by 335% in 2011 and 37% in 2010 from previous year.

Alcoa’s property, plant and equipment decreased by 3% in 2011 after a increase of 2% in 2010.

Alcoa’s current liabilities are increased by 14% in 2011 as compared to decrease of 3% in 2010. The total current lia- bilities at the end of fiscal year 2011 were $22,925 million.

Alcoa’s stock holder’s equity was almost same in 2011 and 2010 at $13 billion as compared to $12 billion in 2009. Alcoa’s shareholder’s equity was stable at 35% at the end of fiscal year 2011, and 2010 and it was 32% in 2009. It is improved by 3%.

Alcoa’s working capital is on increasing trend since 2009. It was $1,608 million in 2009, $1,668 in 2010, $1,700 in 2011. However its current ratio is decreased in 2011 and was at 128% as compared to 132% in 2010 and 130% in 2009. Its quick ratio was almost stable at 11 at the end of fiscal year 2011 and 2010. It was 12.41 in 2009.

Alcoa’s financial leverage (liabilities/assets) was found to be stable at 57% at the end of fiscal year 2011 and 2010. It was 60% at the end of fiscal year 2009.

Alcoa’s profit margin before taxes is 4% at the end of fis- cal year 2011 as compare to 3% in 2010. Alcoa’s change in operating cash is decreased by 3% in 2011 as compared to increase by 70% in 2010 from previous year. Alcoa’s gross profit margin is found to be stable at 18% at the end of fiscal year 2011 and 2010 which is an increase by 10% to 2009. At the end of 2009 gross profit margin was 8%. Alcoa’s revenuegrowth was 19% at the end of fiscal year 2011 which is an incr ease of 5% compared to 2010 (14%).

Alcoa’s ROE-CI was negative 2% in 2011 as compared to 5% in 2010 and -1% in 2009. Its ROE was 6% in 2011 as compared to 3% in 2010 and -8% in 2009. ROE is increased by 50% in 2011 from previous year.

Alcoa’s market-to-book ratio was 1.19 at the end of fiscal year 2011 as compared to 0.92 in 2010 and 1.07 in 2009.


Alcoa’s inventory turnover ratio (COGS/inventory) is 7.0 at the end of fiscal year 2011 as compared to 6.64 in 2010 and 7.2 in 2009. It is almost stable at 7 during last

Alcoa’s EPS (earnings per share) has increased since 2010 but its share price went down. Its EPS was 0.24 in 2010 and increased to 0.57 in 2011. However share price of Alcoa’s went down to 10.28 in 2011 as compared to 17.52 in 2010. Alcoa’s price-to-earning ratio is on declining trend since 2010. Alcoa’s P/E ratio was 17.94 in 2011 as compared to 73.30.

Senstivity Analysis:

Alcoa’s sensitivity analysis is done for 10% increase in net income in 2012 and decrease in net income by 10% in 2012. We found that on 10% increase of net income, Alcoa’s gross profit improves by 56% to $6.9 billion. On decreasing net in- come by 10% Alcoa’s gross profit decreased by 55% to $2.0 billion approximately. Alcoa’s operating profit has increased by 205% to $3.0 billion upon 10% increase in net income and it decreased by 234% to $1.3 billion (loss). Alcoa’s PBT is increased by 235% to $3.6 billion on increasing 10% net income and it decreased by 215% to $1.2 billion (loss) upon decreasing 10% in net income. Alcoa’s ROE is increased byupon decreasing 10% in net income. ROE, operating profit, PBT are sensitive to increase or decrease in net income.


Perspective Analysis and Forescasting:

We have take into account a few assumptions: 1) Alcoa’s netincomeisexpectedtodecreaseby15%in2012 and increased by 5% in 2013 and by 15% in 2014. 2) Alcoa’s bookvalueisexpectedtodecreaseby12%in2012 due to current economic crises in the world. Book value is expected to increase by 10% in 2013, increase by 22% in 2014 and increase by 12% in 2015.

Alcoa’s expected dividends are found to be $23966.24 mil- lion at the end of 2012 fiscal year, $21165.61 million in 2013, and $22939.45 million in 2014. We calculated Alcoa’s eq- uity value to be $65710.22 million. Based on this analysis we found that Alcoa’s current equity $13,844 million is un- dervalued.


Public Perception and Recent Results:

Alcoa has agreed to pay $85 million to settle allegations that the aluminum manufacturer and related companies paid millions in bribes that resulted in a Bahrain-controlled com- pany overpaying for raw materials without admitting liabil- ity. Also it resumed a long-term agreement to sell raw materi- als to Alba which owns one of the largest aluminum smelters in the world. Having said that, the best possible outcome that Alcoa avoids is the expense of litigation. The company is strongly saying that they had no comment on Alba’s calculation of the value of the contract, Alcoa expects to realize a profit from it. This resulted in having shares of Alcoa rose 8 cents to $9.20 in afternoon trading. The price raged from $7.97 to $11.66 per share. Alcoa predicted aluminum demand would grow 6 percent this year, down from 7 percent in the previous quar- ter. Since the world’s second largest economy is investing in infrastructure projects that will help demand but that likely won’t begin to show until the end of the fourth quarter.


Conclusions and Recommendations:

Alcoa performed well to recover from economic crises of 2008-2009 and showed improved performance. Currently Alcoa is trading at $8.26 per share on stock market and its share price got stronger on a average in last 6 months by 0.15%. Its not a bad idea to invest and hold the equity for over a year. Also it is to be noted that Alcoa paid dividends in common and preferred share in past and expected to pay in future as well. Alcoa’s EPS went down in 2009 and after that its on increasing track. Sudden drop in Alcoa’s performance might be due to economic crises in 2008 and company did well to recover in subsequent years and become profitable in 2011. Also’s forecast P/E ratio for 2012 is 31.81 which is almost 60% higher than 2011. Alcoa’s earnings per share in 2013 are expected to be between 0.15 and 0.20 which is not a bad number. Alcoa’s current stock price is $8.26 which got stronger by 0.64% compared to last month. However stock price did not yet cross mark of 2011’s 12.36 yet but it looks promising and on positive track of growth. Also, if we use valuation models for growth prediction, we find that Alcoa may grow by more than 300% in future years. Based on our analysis, we can say that Alcoa’s is good for long term investment.

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