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Alcoa: 39% Upside Via New Strategy And A Split


Management is repositioning the company for growth. The Aerospace segment expects a revenue upside of 82% and the automotive segment expects a revenue upside of 95%.

New innovative R&D products and partnerships underway and already a resulting multi-year $1.1B contract awarded to date.

Numerous inorganic acquisitions completed to date with very promising prospects into segments with higher margins and better growth prospects.

Sold or closed 9 Global Rolled Products (GRP) rolling mills and divested 3 Engineered Products and Solutions (EPS) business.

Alcoa has some good undervalued indicators like: P/S of 0.46 and P/B of 0.92 for starters.

(Source: AA site)

Back in September of 2014, Alcoa (NYSE:AA) announced it would acquire UK aerospace component maker Firth Rixson for about $2.85B with its eye on adding about $1.6B in sales and $350M EBITDA in 2016. In December of 2014, it agreed to buy German titanium maker Tital. This would provide entry into the projected 70% growing revenue stream for more titanium parts for jet engines over the next five years. In March of 2015, AA inked a deal to buy titanium product producer RTI International Metals (NYSE:RTI) for about $1.5B. It was estimated to add to its sales by 2019 up to $1.2B with an EBITDA up to 25% in the same timeframe. Also in March, the company took out a loan for about $259M to, among other things, upgrade its Tennessee plant for the new F-150 trucks that would have an all-aluminum body that was announced back in 2014. Additionally, along these same timelines, it has been taking proactive steps to streamline the company. For example, it is cutting costs and closing high cost plants. All of this activity is part of an overall three-year plan to move the company into more financially rewarding markets going forward and to end up splitting off into two companies in the second half of 2016.

The Upcoming Split

The company's new strategy is to move into more lucrative markets like automotive and aerospace and away from costly aluminum smelters. The plan is to have two very strong companies: Value-Add Company and Upstream Company. Value-Add will be a lightweight multi-material innovation firm while the Upstream Company will be a global competitive firm. Both companies would offer many benefits. See figure.

(Source: 2015 Alcoa Investors Day)

Good progress has been made on both the organic side and the inorganic side to achieve growth. Operational efforts have been enhanced and financial goals achieved to date. The Value-Add company will be made up of aerospace, automotive, commercial transportation, industrial gas...