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Investment Overview for Alcoa (NYSE:AA)
Below are key drivers of Alcoa's value that present opportunities for upside or downside to the current Trefis price estimate for Alcoa:
Primary Metals Division
- Yearly Average Price of Primary Metals: The weakening demand for primary metals led to the average price declining from $2,870 in 2006 to $1,730 in 2009 due to the global economic downturn, before recovering to $2,760 in 2011. The average price in 2012 was much lower than in 2011 due to lower demand. Going forward, if prices remain at around $2200, then this would represent a 5% downside to the Trefis price estimate.
- Primary Metals EBITDA Margin: EBITDA margins for the Primary Metals division have declined from 20% in 2006 to -13.8% in 2009 due to decreasing market demand and rising input costs. Rising aluminum prices helped margins in 2010, bringing it close to 7%. Although the prices of Aluminium fell during the latter half of 2011, Alcoa was able to maintain 15% EBITDA margins on Primary Metal sales. In 2012, EBITDA margins fell below 13%. Alcoa believes that aluminum consumption will double by 2020 from 2010 levels. While we expect margins to remain around 13-14% going forward, if demand growth allows margins to reach 15% by the end of our forecast period then there could be an upside of more than 5% to our price estimate for Alcoa's stock.
Alcoa is the leader in the production of aluminum products such as primary aluminum, fabricated aluminum, and alumina. The company is involved in every aspect of the industry including mining, refining, smelting and recycling.
Aluminum products and alumina represent more than three-fourths of Alcoa’s revenues; accordingly the company is heavily impacted by aluminum prices. The company's non-aluminum products include fasteners for aerospace and industrial customers.
Alcoa operates in more than 30 countries worldwide, in addition to investments in Australia, Brazil, China, Russia, Guinea, and Saudi Arabia.
Bauxite, the primary ore used in aluminum production, along with alumina and power make up more than 70% of the company's total operating costs. Other raw materials used include petroleum coke, aluminum fluoride, fuel oil, steam and coal.
Engineered Products division is most valuable for Alcoa
The Engineered Products segment includes titanium, aluminum, and super alloy investment castings; forgings and fasteners; aluminum wheels; integrated aluminum structural systems; and architectural extrusions.
Products are sold directly to industrial and retail customers and through distributors. Hard alloy extrusions products serve the aerospace, automotive, and commercial transportation markets.
Aluminum demand should increase as it replaces other metals
- Aluminum is lightweight and its use in automobiles can help reduce vehicle weight and therefore emissions. As automotive and aircraft manufacturers look to improve fuel efficiency we expect more applications of aluminum in their products.
- Aluminum is a durable and low-maintenance (corrosion resistant) metal, and therefore has seen more applications in the construction industry.
- The metal is also malleable and ductile, which helps in the storage and distribution of retail products. Accordingly it is used widely in packaging.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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