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Investment idea - Alcoa

About. Alcoa is the world’s leading producer of primary and fabricated aluminium; company is also the largest bauxite miner and alumina refiner. It employs around 61k people in 30 world countries. Sales volume in 2012 - US$23.7 bln.

Alcoa outlook for YE2013.

Company forecasts growth in the global end markets:

  1. Aerospace segment is expected to grow by 9-10% yoy;
  2. Automotive production growth rate will be near 1-4% yoy; Europe will show 2-5% decline though;
  3. The biggest driver for Heavy Truck & Trailer segment is China (+12-16% yoy), while North America and Europe decreasing; global segment to grow by 3-8%;
  4. Beverage Can/Packaging growth expected to be slightly higher yoy, at 1-2%;
  5. Commercial building and Construction, as well as Industrial Gas Turbine segments will both grow by 3-5%.

Investment case. We see some points that make Alcoa’s shares attractive investment in the long-term perspective.

  • Company has extremely strong relationships in the Commercial Aerospace area
    • After Paris Air Show this year Alcoa received over 900 new orders and/or commitments from Airbus and Boeing for total volume of c.US$135 bln, current backlog is 8 years;
    • Another portfolio of orders and commitments with engines’ producers – Pratt & Whitney (over 1000 engines), GE & Partners (US$26 bln in deals), Rolls-Royce (US$5 bln in deals);
    • Demand is strongly supported by emerging markets and fuel efficiency;
  • Auto demand expected to continue growing strongly in upcoming quarters;
  • Company successfully maintains multiple-level cost reduction strategy, which expected to save US$540 mln in costs comparing to previous year (reduction by 40%).

Target price. Our 12-months target price for Alcoa stock (AA US Equity) is $10 per ordinary share.