Aerospace The Byword For Alcoa With The Latest In A String Of Deals In The Segment

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Alcoa (NYSE:AA) has announced more deals pertaining to the aerospace segment, with the company firmly shifting focus towards its value-added businesses, particularly the aerospace segment, prior to the planned split of its commodity and value-added businesses later this year. The company signed long-term supply deals with GE Aviation and Boeing over the course of January. [1] Whereas Alcoa will supply GE Aviation with a range of nickel-based superalloy, titanium, and aluminum jet engine components, it will supply Boeing with a range of multi-material components for the wing, fuselage, and landing gear of various Boeing aircraft. [2] Including these latest deals, the company has signed $10 billion worth of new deals pertaining to the aerospace segment over the past twelve months, firmly underscoring the strategic direction that the company intends to take. [2]

Aerospace Takes Center Stage

Alcoa’s value-added sales to the aerospace segment accounted for roughly 23% of the company’s third party revenues in 2015, making it the second largest source of revenue for the company behind the sales of primary aluminum, which accounted for around 25% of the company’s total third party sales. [3] With the flurry of new deals pertaining to the aerospace segment, Alcoa’s aerospace segment sales are likely to become the largest source of revenue for the company going forward. This reflects the broader strategic shift in the company’s operations towards its value-added segments, which produce a range of multi-material components primarily for the aerospace and the automotive end markets. Alcoa sees a firm nine year order book for its aerospace sales. [4] In addition, automakers are increasing the usage of aluminum in their vehicles to reduce vehicle weight, in order to comply with stringent automobile emissions regulations in North America and Europe. As per a study by Ducker Worldwide, the volume share of aluminum in automobiles in North America is expected to rise from 6.6% in 2015 to 26.6% in 2025. [5] Given the robust demand expected in both the aerospace and automotive end markets, prospects look quite promising for Alcoa’s value-added businesses.

LME Aluminum Prices, Source: LME

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In order to decouple the fortunes of the high-growth value-added businesses from its commodity businesses, Alcoa will split its value-added and upstream businesses into two separate publicly traded companies later this year. The prospects of Alcoa’s upstream businesses have been negatively impacted by weakness in aluminum prices (as illustrated by the chart shown above) due to slowing economic growth in China, the world’s largest consumer of the metal. A culmination of Alcoa’s ongoing portfolio transformation, the split will create two standalone entities that are completely different from each other – the traditional upstream commodity business and a high-growth value-added business. While the upstream business will be looking to focus on controlling costs to combat low commodity prices and weak demand conditions, given the flurry of activity in terms of the signing of new deals, the value-added company will certainly benefit from a fast growing top line.

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Notes:
  1. Alcoa Announces Long-Term Contract with GE Aviation, Alcoa News Release []
  2. Alcoa Wins Fourth Boeing Contract in String of Recent Deals, Alcoa News Release [] []
  3. Alcoa’s Q4 2014 Earnings Presentation, Alcoa Website []
  4. Alcoa’s Q4 2015 Earnings Call Transcript, Seeking Alpha []
  5. 2015 North American Light Vehicle Aluminum Content Study, Ducker Worldwide []