ALCOA (AA)


Alcoa Inc. (NYSE:AA), is an American company incorporated on September 18, 1888 and listed on the New York Stock Exchange (NYSE). Alcoa’s core business is the manufacture and engineering of lightweight metals. Alcoa is heavily involved in the aviation, automobile, defence, packaging, construction, oil and gas, consumer electronics, and industrial applications industries on a global scale. Alcoa produces products which are based on aluminium, titanium and nickel. Perhaps its greatest work is in the aluminium industry where it is involved in the development of new technology as well as in active mining, smelting, refining and fabrication of aluminium and alumina-based products. Money earned from sales of primary aluminium and alumina account for almost 40% of Alcoa’s total operating revenues.

Alcoa actively operates in four market segments as far as the lightweight metals business is concerned. These segments are:

  1. Alumina
  2. Primary Metals
  3. Global Rolled Products
  4. Engineered Products and Solutions.

Alcoa has significant investments and operational activities in about 30 countries. Alcoa’s operations can be classified into upstream, midstream and downstream operations.

  1. Upstream Operations

The mining of bauxite and subsequent refining into alumina is a significant component of the upstream operations of Alcoa. Less than half of alumina is retained by the primary metals division of Alcoa, while the rest is sold to clients across the world.

The portion of alumina retained by Alcoa’s primary metals division is used in the manufacturing of aluminium which is sold either directly to clients across the world or used in Alcoa’s fabricating businesses. Primary aluminium sales to third party clients account for nearly 90% of the primary metals division revenues.

  1. Midstream Operations

Alcoa’s midstream operation is made up of its Global Rolled Products division. This division produces and sells aluminium plates and sheets, used widely in the production of aluminium beverage cans and packaging materials. Some of the sheet and plate products are used in manufacturing of aircraft and car parts, as well as components used in building and construction, production of machinery and consumer durables.

  1. Downstream Operations

Alcoa’s downstream segment is the engineering division where production of titanium, and aluminium alloy products is carried out.

It is important to understand the structure of Alcoa’s operations as this will enable the trader understand the relationship between the stock price of Alcoa and the price of aluminium and its derivative products.

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Interesting Facts About Alcoa

Alcoa’s stock price has been hit hard by the global aluminium glut and depressed aluminium prices. Alcoa’s price plunged from a 52-week high of $17.10 to a 52-week low of $7.8, representing an almost 50% drop. As such, the company has sought to intervene by boosting the contribution of its midstream and downstream operations to its overall revenue picture. A number of interventions have been performed by the management of this company in 2015 to this end. These are as follows:

  • Alcoa signed an agreement with Airbus in Q3 2015 to be the exclusive supplier of its high-tech multi-material aerospace fastening systems in a deal worth about $1bn. This is Alcoa’s largest supplier agreement to date.
  • Alcoa also intends to split its current structure into two separately named and publicly quoted companies in 2016, in a move which is designed to allow its flourishing aerospace fasteners business and other value-added products space to grow and add more revenue to the company’s coffers.

How Will Alcoa’s Split Impact Investors?

Perhaps the biggest news in the horizon for Alcoa is the proposed split of its commodities division from its specialty aluminium business. A lot of times, we see companies splitting certain segments of their business in order to allow the divisions with perceived hidden value to flourish on its own and stoke investor interest. A similar move has been performed by eBay in allowing a split of its payment processing unit PayPal from the parent company in order to compete with other standalone payment processors.

Alcoa Inc expects to complete the separation of the two business units in the second half of 2016 and has announced personnel changes to manage this transition. The commodities business is to be headed by Roy Harvey, who is the current head of the traditional aluminium smelting, mining and refining operations.

This is a move which is expected to insulate the company’s flourishing midstream and downstream operations from the aluminium glut which has stifled earnings from its upstream operations.

Traders should therefore watch out for the new spin-off company which is yet to be named. Analysts are also expecting that the parent Alcoa business will ultimately benefit from this arrangement, as its share price is believed to be currently undervalued by almost 50%.

In trading Alcoa, it is essential that traders watch the state of the aluminium market as well as the market for its derivative products for signs of direction when trading. Earnings reports are also good for short term trading activity.