Alcoa: New Look for Aluminum

06/11/2015 8:00 am EST


Briton Ryle

Editor, The Wealth Advisory

Commodity prices have been in the tank and aluminum prices have already been in a downtrend since 2010. So why in the world would I recommend an aluminum company right now? questions Briton Ryle, editor of The Wealth Advisory.

Because investing is about the future and the future for Alcoa (AA)—the third-largest aluminum producer in the world—looks really good regardless of what aluminum prices do. That’s right…I said regardless of what aluminum prices do.

In 2008, Klaus Kleinfeld became the new CEO. He has been repositioning the company to focus more on finished, value-added products and less on bulk aluminum.

He has cut costs; Alcoa has closed or sold 13 smelting facilities and idled eight more. In addition to the Jamaica refinery closing, it has idled two more refineries.

Meanwhile, Alcoa has announced three critical acquisitions. First, in June 2014, it bought Firth Rixson for about $3 billion. Firth Rixson makes titanium jet engine parts.

Then, Alcoa bought out Germany’s Tital, which makes titanium and aluminum structural castings for aircraft engines and airframes.

Finally, in March, Alcoa announced it was acquiring RTI International Metals (RTI) for $1.58 billion. RTI provides titanium for plane engines, landing gear, and airframes.

Alcoa has a $1.1 billion agreement to supply key parts to Pratt & Whitney. And it has a long-term deal with Boeing (BA) to supply aluminum sheet and plate products.

In addition to the booming aerospace industry, the auto industry is quickly adding aluminum to its new cars. Alcoa’s sales to the auto industry are expected to nearly triple by 2016.

Alcoa is expected to earn $1.05 a share this year on $24.2 billion in revenue and $1.21 a share in 2016 on $26.29 billion in revenue.

So, right now, it is trading for about 11 times 2016 earnings. I rate Alcoa a strong buy below $14. My 12-month price target is $22.

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