AA

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Alcoa’s First Quarter Results: The Most Important Slide

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Image Source: Alcoa Notes: Aerospace: 7.5% end market CAGR (2013-2016); ~8 year production backlog for large commercial aircraft Automotive: >50% CAGR for North American auto sheet (2013-2016); North American aluminum auto sheet demand by 2025 over 1 million metric tons Commercial Transportation: 3-4% heavy duty truck market CAGR (2013-2016); 40% of wheels market expected to be aluminum by 2014 Packaging: 2-3% global beverage can market CAGR (2013-2016); aluminum penetration versus steel continues in China, Asia, Europe and Africa (currently 86% globally) Continued Growth Across End Markets Alcoa is increasing its 2014 global aerospace growth expectation by one percentage point (8 percent to 9 percent, previously 7 percent to 8 percent), on strong demand for both large commercial aircraft and regional … Read more

Alcoa’s 4Q Earnings Fall Short of Expectations

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Aluminum giant Alcoa’s (AA) fourth-quarter results, released Thursday, left much to be desired. Revenue fell more than 5% from the same period a year ago, as a huge non-cash goodwill impairment charge tied to legacy smelting operations pushed earnings deep into the red. Though on an adjusted basis the firm generated net income of $40 million, or $0.04 per share, the performance was terrible and showed how weak aluminum prices, which were 7% lower than the year-ago period, can punish results. The aluminum giant earned $0.06 per share on an adjusted basis in last year’s period. At the end of the quarter, Alcoa noted that 57% of its revenue and 80% of its segment profits came from value-add businesses (Engineered … Read more

The Dichotomy of Airlines and Aerospace

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On Monday, top insurance idea AIG (AIG) announced that it would sell International Lease Finance Corporation (ILFC) to aircraft leasing firm AerCap Holdings (AER) for $5.4 billion, consisting of $3 billion in cash and the balance in newly-issued AerCap common shares. Though we think ILFC was one of the crown jewels of AIG’s business particularly considering the prospects for global air travel demand in coming years, the price is fair and opportunistic, especially since AerCap is risking its investment-grade status to facilitate the deal. We don’t think better terms could have been had by either party, given financial constraints, and shares of both entities are moving higher on the news. The combined AerCap-ILFC will be #2 on the world stage … Read more

Alcoa’s Third Quarter Results Reflect Focus on Cash Management

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Leading aluminum and alumina producer Alcoa (click ticker for report: ) posted decent third-quarter results Tuesday afternoon. Revenue declined 1% year-over-year to $5.7 billion, modestly above consensus estimates. Earnings per share, adjusted for special items, surged to $0.11 from just $0.03 during the same period a year ago. Free cash flow during the quarter was negative $36 million, a $3 million improvement year-over-year. Focus on Cash Management Image Source: AA In our view, an owner’s earnings aren’t found on the income statement, but rather on the statement of cash flows. Alcoa agrees, and as such, the firm has focused extensively on improving its cash operations, targeting breakeven performance in seasonally-weak quarters. Thus far, Alcoa has achieved better-than-anticipated productivity gains while … Read more

Alcoa Is Stuck in Neutral

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Monday afternoon, industrial bellwether Alcoa (click ticker for report: ) announced solid second-quarter results. Revenue was down 2% year-over-year to $5.8 billion, a tad shy of consensus estimates. Excluding the impact of special items, earnings per share were up one cent year-over-year to $0.07, exceeding consensus estimates. Free cash flow declined slightly year-over-year to $228 million, or 4% of revenue. Engineered Products and Solutions (EPS) Image Source: AA Analyst Presentation Q2 2013 Yet again, Alcoa’s Engineered Products and Solutions business, its largest profit driver, was the standout performer for the quarter. After tax operating income (ATOI) hit a record level of $193 million, up 23% year-over-year, on revenue that only increased 3% year-over-year. The segment registered an all-time high in … Read more

Alcoa’s Guidance Bodes Well for Aerospace

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Industrial stalwart Alcoa (click ticker for report: ) reported solid fourth quarter results and relatively optimistic 2013 guidance. Revenue exceeded expectations, falling 2% year-over-year to $5.9 billion. Earnings, after excluding several one-off items, were $0.06, roughly in-line with consensus estimates and favorable compared to the same period a year ago. Upstream products continue to feel the pressure of weaker commodity pricing, which has obviously negatively impacted earnings. However, the company has been able to lower its position on the cost curve, leaving it with considerable leverage to the upside in the event of price appreciation. Though upstream revenue remains mostly weak (even with favorable supply/demand dynamics), Alcoa continues to drive strong earnings from its midstream and downstream products, particularly in … Read more

Fiscal Cliff Averted; Aerospace Rallying

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After a volatile December, two of our favorite aerospace names, Astronics (click ticker for report: ) and EDAC Technologies (click ticker for report: ), are rallying significantly after a deal was finally reached to avert the fiscal cliff. Precision Castparts (click ticker for report: ), which had steadily moved higher during the fiscal-cliff ordeal thanks to optimism surrounding its planned acquisition of Titanium Metals (TIE), is also seeing strength today. We assumed both profit taking and overblown fears of defense cuts were the culprit behind the increased volatility, and it seems as though that could be the case. We continue to see substantial upside at these firms thanks to the massive, multi-year commercial aerospace backlogs of the large airframe makers. Our Best Ideas portfolio … Read more

You Are Ahead of the News As a Valuentum Member

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Remember When We Said Economic Prognosticators Were Off Their Rockers? From the September 2012 edition of our Best Ideas Newsletter (see page 2), released September 15, 2012: “Could you imagine if you had listened to bond-king Bill Gross (please note he is not the equity king), Marc Faber (author of the Gloom, Boom & Doom report) or the Economic Cycle Research Institute (ECRI), which called for a recession in September 2011 – some 30% in the S&P 500 ago (yes, 30%!). Aside from being incorrect, bearish economic prognosticators fully admit that their expectations have little to do with what may happen to the equity markets in the future (as Bernanke’s unlimited QE has shown). Still, such admissions do not stop … Read more

FAQ: Why Doesn’t the ‘Percentage Undervalued/Overvalued’ Match Up to the Actual Discount/Premium to Valuentum’s Fair Value Estimate of the Company?

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We view the intrinsic value of a firm as a range, not a single point estimate. So instead of us saying that a company is worth exactly $55 per share, for example, instead we’d say it is worth between $50 (low end) and $60 per share (high end) — think of this range as our margin of safety. We use a margin of safety due to the inherent uncertainty of predicting with absolute precision a firm’s future free cash flow stream — a firm’s future free cash flows determine our estimate of the company’s intrinsic value, and the future is not known yet. As a result, the ‘percentage undervalued/overvalued’ (as shown on our 16-page reports) is calculated by comparing the firm’s current price with the … Read more