Alcoa is one of the world’s largest producers of aluminium and aluminium-related products. The company operates numerous aluminium mines and smelters across the globe and is expanding into emerging markets where demand is on the rise.
The company recently reported its second quarter earnings for this fiscal year. Net profits missed analyst consensus estimated by 1 cent. Revenues for the quarter however grew nearly 27% year-over-year, and was $6.6 billion beating consensus estimate of $6.3 billion.
Improving market prices for aluminium fuelled by demand from China and other rapidly developing economies helped drive revenues for the quarter. The company’s products are segmented into four groups — Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. For the quarter, Alumina shipments grew 11.8% year-over-year, Flat-Rolled Products shipments increased 24.8% year-over-year, and Engineered Products and Solutions shipments increased 23.9% year-over-year. Primary Metals shipments were flat compared with the year-ago quarter.
The company has come back well from a recent string of poor earnings and is projected to post a phenomenal 70.5% annual EPS growth in the next five years. Unadjusted net profits for the quarter doubled year-over-year, and if the company can keep up this performance, its stock should be able to follow suit.
Demand among the automotive and aerospace industries is
also slowly growing. Alcoa manufactures innovative solutions for the transportation industry which helps improve efficiency through its Engineered Products and Solutions segment, and looks poised for good revenue growth.
In June, the company also unveiled new aluminium products for use in the aerospace industry enabling better savings through fuel efficiency.
In this quarter’s report, Alcoa projected sustained global growth in all industries including 7% for aerospace, 4–8% for automotive, and 7–12% for commercial transportation.
Aluminium is increasingly becoming the preferred choice in the construction of lightweight and efficient automobiles and aircraft. Also, demand from countries like China, Brazil, India, and Russia is pushing aluminium prices to new highs with the trend expected to continue. Going forward, automobile manufacturing is expected to be ramped up in Japan following a few quiet months after the disaster in March.
AA is currently trading at a price of $14.87, and with a P/E ratio of 17.15 presents an attractive entry point. The stock has an average target price of $20.00 indicating an upside potential of nearly 35%.
Alcoa anticipates that global demand will double by 2020 using 2010 as a base year, at a rate of 6.5% annually. As a large global producer of aluminium,Alcoa is set to benefit from the growing demand for the metal. The company’s stock shows excellent potential and should hold steady in the long term.