Alcoa's (AA) Q4 Earnings Top On Aerospace, Auto Strength - Analyst Blog

Alcoa Inc. (AA) surpassed earnings estimates in the fourth quarter of 2014 on strong aluminum demand from aerospace and automotive markets and higher metals pricing, backed by its ongoing efforts to reposition its portfolio.

The New York-based company raked in a profit, as reported, of $159 million or 11 cents per share in the fourth quarter as against a net loss of $2.3 billion or $2.19 per share in the year-ago quarter and compared with an income of $149 million or 12 cents per share in the third quarter.
Alcoa recorded $200 million in restructuring charges in the upstream and midstream businesses. Restructuring actions were mostly related to cost reduction in the commodity business.

Excluding one-time special items, earnings came in at $432 million or 33 cents per share in the reported quarter, much ahead of the year-ago earnings of $40 million or 4 cents per share. Earnings per share also surpassed the Zacks Consensus Estimate of 26 cents.

For 2014, Alcoa posted net income of $268 million or 21 cents per share, as opposed to a net loss of $2.3 billion or $2.14 per share in 2013. Excluding the impact of special items, net income came in at $1.1 billion, or 92 cents per share, up from net income of $357 million, or 33 cents per share in 2013. Earnings topped the Zacks Consensus Estimate of 86 cents.

Revenues rose 14.2% to $6,377 million in the fourth quarter from $5,585 million in the year-ago quarter and also increased 2.2% from the previous quarter. Revenues exceeded the Zacks Consensus Estimate of $6,023 million. The increase can be mainly be attributed to higher sales in Alcoa’s mid and downstream businesses, increased metal prices and energy sales.

For 2014, revenues increased 4% year over year to $23.9 billion, also ahead of the Zacks Consensus Estimate of $23.5 billion.
Alcoa expects global aluminum demand to rise 7% in 2015. The company’s shares gained 1.4% in the after-hours trading yesterday.




Segment Review

Alumina - Shipments in the reported quarter were 2.9 million metric tons on production of 4.2 million metric tons. After Tax Operating Income (ATOI) was $178 million, up from $70 million in the year-ago quarter as well as $62 million in the sequentially preceding quarter. The sequential rise was mainly due to higher pricing favorable currency exchange rates and energy costs and higher productivity. However, this increase was partly offset by higher pre-operational costs at the Saudi Arabia refinery and maintenance costs.

Primary Metals - Shipments in the quarter were 0.6 million metric tons, down 11.2% from the year-ago quarter. Production in the quarter was 0.7 million metric tons, down 15.6% from the prior-year quarter. ATOI was $267 million compared with negative $35 million in the year-ago quarter and $245 million in the prior quarter.

The sequential improvement in ATOI was led by higher realized prices, the absence of charges related to earlier announced smelter closures in Italy and Australia, higher productivity, ramp up of the Saudi Arabia smelter and favorable foreign exchange translation.

Global Rolled Products - Shipments in the quarter were roughly 0.5 million metric tons, up 7.3% year over year. Third-party revenues were $1.9 billion, up 14.8% year over year. The segment posted ATOI of $71 million, which increased 238% year over year but decreased 31.1% sequentially. The year-over-year jump was led by strong productivity, higher metal prices, and increased automotive and aerospace volumes in North America. The segment will continue to boost production in the first quarter of 2015 to cater to the growing demand for aluminum intensive vehicles.

Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 10.7% year over year. The segment posted ATOI of $165 million, down 1.8% year over year and 21.1% sequentially. The sequential results were driven by favorable productivity and higher volumes.

Financial Position

Alcoa’s cash and cash equivalents stood at $1,877 million as of Dec 31, 2014, a 30.6% increase from $1,437 million as of Dec 31, 2013. Alcoa had a debt-to-capital ratio of 37.4% at the end of 2014 compared with 34.8% a year ago.

Portfolio Transformation

In the downstream business, Alcoa has wrapped up the acquisition of jet engine component maker – Firth Rixson. With this buyout, Alcoa’s sales are expected to increase by $1.6 billion, adding another $350 million to earnings before interest, tax, depreciation and amortization (EBITDA) by 2016 and $2 billion by 2019.

Alcoa has taken another major step to expand in the fast-growing aerospace market as it has agreed to buy Germany-based Tital – a leading provider of titanium and aluminum structural castings for aircraft engines and airframes.

The move is in sync with Alcoa’s goal to profitably grow its aerospace franchise and is part of the company’s portfolio transformation strategy as it plans to gradually shift its focus to the lucrative aerospace and automotive markets. TITAL’s titanium revenues are expected to increase 70% and the transaction is expected to close in the first quarter of 2015.

Alcoa also announced that it is doubling its jet engine coating technology capacity at its Whitehall, MI, facility to further reinforce its global aerospace portfolio to address increasing demand for hotter-running, more fuel-efficient jet engines.

In the midstream business, Alcoa has launched the Micromill to make the most advanced aluminum sheet on the market. Micromill’s breakthrough casting technology will allow Alcoa to capture rising demand from the automotive industry. Automotive parts made with  Micromill material will be twice as formable and 30% lighter than parts made from high strength steel.

During the quarter, Alcoa finalized the sale of three European rolling mills, two in Spain and one in France, to a subsidiary of Atlas Holdings LLC. The company also completed the closure of the Point Henry and Yennora can sheet rolling mills in Australia. All these actions are taken to better focus on higher growth products and markets.

Strategic Actions

Alcoa’s strategic repositioning of its value and commodities businesses is working well for the company. While making capital investments, it also remains on track to move down the cost curve and curtail capacities in its upstream business, which will improve the competitiveness of the company’s Primary Products business.

Alcoa has completed the sale of two upstream assets. Alcoa World Alumina and Chemicals divested its 55% ownership stake in the Jamalco bauxite mining and alumina refining joint venture to Noble Group Ltd for $140 million. Alcoa also disposed its 50.33% stake in the Mt. Holly aluminum smelter to Century Aluminum Company for $67.5 million. Since 2007, the company has curtailed, closed or sold 1.3 million metric tons, or 31%, of its highest cost global smelting capacity.

Moreover, the Ma’aden-Alcoa joint venture refinery in Saudi Arabia is fully operational and profitable and produced its first alumina in the fourth quarter.


Alcoa expects global aerospace sales to increase 9% to 10% year over year in 2015 on the back of strong demand for large commercial aircraft, regional jets and jet engines. For automotive, the company forecasts steady growth to continue this year. Alcoa anticipates global automotive production in the range of 2% to 4%, supported by replacement demand, low lending rates in North America, and the growth of both the middle class and clean air regulations in China.

Alcoa expects stable  global commercial transportation production of negative 1% to positive 3% for 2015. The company expects the trucking market in North America to remain positive in 2015 with an increase of 3% to 7% in production on strong orders and freight growth. In the packaging market, Alcoa envisions worldwide sales growth of 2% to 3% in 2015.

Alcoa sees the building and construction market to continue to improve from 2014 levels with worldwide sales growth of 5% to 7% this year. While the North American market is expected to sustain its gradual recovery in 2015, the European market is likely to decline.

Alcoa expects growth rate in the range of 1% to 3% in 2015 for the industrial gas turbine market, a turnaround from a decline in 2014. Improvement is expected in the airfoil market as original equipment manufacturers develop new, advanced turbines and upgrade existing turbines.

Alcoa currently carries a Zacks Rank #2 (Buy).

Other companies in the mining space worth considering include Energy Fuels Inc. (UUUU), Dominion Diamond Corporation (DDC) and Platinum Group Metals Ltd. (PLG). All of these stocks hold a Zacks Rank #2 (Buy).

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