Alcoa (NYSE:AA) recently announced that its next-generation aluminium alloy has the potential to make a significant impact in the aerospace industry. The company is demonstrating its revolutionary fuselage panel made by Spirit AeroSystems at the 2011 Paris Air Show.  Its third-generation Al-Li 2060 aluminum-lithium alloy can dramatically reduce airline weight while providing strength which is equal to or better than the composites currently in use. Alcoa is the world leader in the production and management of primary aluminum, fabricated aluminum and alumina, and competes with other international metals and mining giants like Rusal, Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP) and Chalco (NYSE:ACH).
Our price estimate for Alcoa, at $19.76, implies about 30% premium to the market price.
Alcoa’s Aerospace Business at a Glance
- Alcoa’s Q3 2016 Earnings Review: Productivity Improvement Initiatives Drive Improvement In Results
- Alcoa’s Q3 2016 Earnings Preview: Productivity Improvement Initiatives To Boost Results
- Here’s Why We’ve Changed Our Price Estimate For Alcoa
- How Would A 10% Increase In Bauxite Prices Impact Alcoa’s Cost Of Producing Alumina?
- How Important Is Alumina In The Production Of Aluminum?
- Alcoa Q2 Earnings Review: Productivity Improvement Initiatives Partially Offset Impact Of Weak Aluminum Prices
Alcoa has extensive operations to cater to the needs of the aerospace industry and provides aluminium solutions “from nose to tail and from wing-tip to wing-tip.”  Alcoa is the largest provider to the aerospace industry in terms of market share with these operations generating almost $3 billion in revenues for the company.
The company provides structural solutions to aircraft manufacturers through its Global Rolled Products and Forgings & Extrusions divisions, which we consider as a part of the company’s flat-rolled products division.
Other aerospace requirements are catered to by the Fastening Systems and Power & Propulsion divisions, which are reported by the company under its engineered products division.
The New Alloy Looks Promising
Aircraft manufacturers are always looking for ways to reduce the weight of their aircrafts without risking strength as this results in better fuel efficiency. This has been cited as popular theme at this year’s Paris Air Show.
Alcoa’s latest alloy caters to this need while providing another significant advantage – it can be used to manufacture aircraft components directly on the manufacturer’s existing production lines. This ensures easy adoption of the new alloy. Moreover, the alloy is also cheaper to maintain – which will reduce overhead costs for the airlines buying the aircraft too.
We currently forecast an annual growth of more than 5% in the sales for Alcoa’s flat-rolled products division which will produce this new alloy. The impact of faster growth in this division’s sales on the company’s $19.76 share price can be understood by making changes to the graph above.Notes:
- Alcoa and Spirit AeroSystems Show the Future of Next Generation Jetliner Production is Now with an Advanced Aluminum Fuselage Panel at the Paris Air Show, Alcoa Press Releases, Jun 19 2011 [↩] [↩]