Alcoa (AA) no longer is the industrial bellwether it once was as the global economy migrates more toward a service orientation, but the aluminum giant still has its hands in a lot of end markets. The company’s third-quarter results, released October 8, showed revenue falling 11% on a year-over-year basis, and modest net income of $0.07 per share, excluding special items. Acquisition and divestitures muddied the waters, but the general take was a negative one.
The company is doing the best it can to migrate away from the volatility of its lower-margin operations, focusing its efforts on value-add operations, and while it is making progress, the company remains tied to the broader economic environment and the pricing pressures that inevitably progress through the course of the cycle. Its Engineered Products and Solutions revenue set a record in the period thanks to burgeoning aerospace revenue, while Global Rolled Products automotive revenue more than doubled on a year-over-year basis. The company expects global aerospace sales to leap 8%-9% and automotive production to advance 2%-4% in 2015.
New orders from Lockheed Martin (LMT), Airbus (EADSY), and Ford (F) graced the period, as the metals producer completed the previously-announced acquisition of RTI International Metals (RTI). Alcoa recorded the best Alumina profitability year-to-date since 2007, and its free cash flow generation was respectable at $152 million in the period. Plans to separate its business into two Fortune 500 companies, one value-add focused and the other upstream focused, remains on track for completion in the second half of 2016. The company’s new value-add company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions.
Though Alcoa continues to executive well, the firm remains inextricably tied to the price of aluminum, with the Midwest transaction price down ~27% year-to-date through the end of September. Not all is well in China (FXI) either. The company cut its estimate for 2015 automotive production growth to up 1%-2%, from up 5%-8% previously, reduced its projection for 2015 heavy duty truck and trailer production to down 22%-24%, from down 14%-16% previously, reduced its 2015 commercial building and construction sales growth to up 4%-6%, from up 6%-8% previously. Economic growth in China is slowing at a much faster pace than Alcoa was anticipating, and it is perhaps slowing faster than market expectations as well.
We’ve stated previously about our concerns about holding the aluminum bellwether in the piece, “The Time to Consider Owning Alcoa Has Passed,” and we’re reiterating those views today. Our favorite metal-bender Precision Castparts (PCP) has already been scooped up by the Oracle of Omaha. Alcoa’s value-add business could become interesting after the split, but only at the right price.