We recently wrote on Airbus’ plan of setting up a $600 million factory to build jetliners in Alabama, U.S., and how this will impact the job market and its largest rival Boeing (NYSE: BA). But, there is another U.S. company, Alcoa (NYSE:AA), that stands to benefit from Airbus’s plan. Alcoa is one of the leading suppliers of aluminum products such as aluminum sheet and plate, extrusions, fasteners, forgings to aerospace industry globally. The company is into production and management of primary aluminum, fabricated aluminum and alumina. Below we assess the event’s impact on Alcoa’s value.
While we currently have a price estimate for Alcoa at $12 or a premium of close to 35% to the current market price, we are waiting for its second quarter earnings scheduled July 9 before we update our price estimate to reflect the dwindling aluminum prices.
Recently, aluminum has seen an increase in usage in the automotive and aerospace industries globally as manufacturers push to make lighter, more fuel efficient vehicles. Airbus’s new plant will certainly result in an increase in aluminum demand, going forward, as it will build A320 models and expects to produce as much as four planes each month from 2017 at the new plant. We have discussed the details in a note, Airbus Brings The Fight To Boeing’s Turf With U.S. A320 Facility.
We believe with its proven innovation abilities for the aerospace industry, Alcoa is well-positioned to tap that demand. The company will have the proximity advantage due to its huge aluminum mill products factory at Riverdale, Iowa. Further, the company already supplies aerospace aluminum sheet and plate for the A380 and other Airbus models and may not find it difficult to convince Airbus.
Aerospace operations spread across Engineered Products and Global Rolled Products divisions and contribute nearly $3 billion to the company’s total revenues.  For 2012, the company estimates that aluminum demand will grow by 7% compared to 10% in 2011, primarily driven by global aerospace demand and partially offset by a decline in European sales.
While in the recent past the market has been quite harsh on Alcoa’s stock, we believe the company is on the right path with the help of its midstream (flat-rolled aluminum sheets) and engineered products. However, the primary aluminum and alumina segments are still grappling with oversupply in the market. The company’s recent strategy realignment and capacity cuts for smelters and alumina refining should help it withstand the pressure.Notes: