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Alcoa Inc. (NYSE: AA) By: Adam Beck, Nicole Hall, Daniel South Sector: Basic Materials Industry: Aluminum NYSE: AA
Current Price $17.3352 Week Range 9.81-17.48
50-Day Moving Avg $16.14200-Day Moving Avg $13.26
Target 2011 $22.14Market Cap 17.56 Billion
P/E (ttm) 70.99P/S (ttm) 0.85P/B (mrg) 1.30
PEG Ratio ( 5yr exp) 0.90ROE (ttm) 2.45%ROA (ttm) 2.02%
Shares OutStanding 1.021 BillionEnterprise Value 25.46 Billion
EV/EBITDA 9.41Beta 2.17
Alcoa Inc Snapshot
Competitive Advantage Largest aluminum company in the world
A global presence throughout entire supply chain in over 31 countries
Diversified across 10 industries
Strong historical performance
SMF portfolio diversification
Recommendation
BUY 3,000 Shares @ $17.33 for a NAV $51,990
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Table of Contents Company Overview……………………………………………………………………….2 Risks……………………………………………………………………………………….3 SWOT Analysis…………………………………………………………………………...4 Cash Sustainability Program ……………………………………………………………...5 Macroeconomic Analysis………………………………………………………………….6 Sales Demographics……………………………………………………………………….7 Emerging Markets…………………………………………………………………………8 Industry Analysis………………………………………………………………………….9 Mitigating the Risk of High Energy Costs ……………………………………………....11 Competitors………………………………………………………………………………11 Pro Forma Income Statements……………………………………………………..…… 13 Financial Ratio Analysis ………………………………………………………………...15 Multiples Valuation ……………………………………………………………………..20
P/S Valuation P/B Valuation EV/EBITDA Valuation P/E Valuation
DCF Valuation…………………………………………………………………………...25 P/FCFF Valuation
Making Room for Alcoa in the SMF Portfolio….……………………………………….27 Economic Value Added …………………………………………………………………28 Investor Relations ……………………………………………………………………….29 Recent News……………………………………………………………………………..31 2011 Target Price………………………………………………………………………..32 Recommendation………………………………………………………………………...33 Appendix…………………………………………………………………………...……34
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Company Overview
Alcoa Incorporated is the world’s leading producer of aluminum, fabricated aluminum, and alumina. Alcoa was founded in 1888 by Charles Martin Hall, a college student, who was dedicated to finding an efficient process for extracting aluminum from bauxite ore. Through his innovative smelting process and further technological advancement, Alcoa has become the largest producer of aluminum in the world. Alcoa has over 59,000 employees in 31 different countries. The company is separated into four main segments which include flat-rolled products, primary metals, engineering products, and alumina. Alcoa is vertically and horizontally integrated throughout the product cycle beginning with exploration and ending with recycling. They are diversified across the aerospace, energy, alumina, automotive, building, commercial transportation, consumer electronics, industrial products & services, oils & gas, and packaging markets.
Today, Alcoa is focused on the future. In 2005, global aluminum production amounted to 31.9 million tons, the second largest metal produced behind iron. Forecasts for 2012 aluminum productions predict output between 42-45 million tons, putting Alcoa at the forefront of the aluminum industry.
Key Points • Alcoa is global leader in aluminum production and recycling • Employs 59,000 people across 31 countries • Over 120 years of experience • Diversified across 10 market segments • Leader in aluminum and alumina innovation
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Risks
The risks associated with Alcoa are directly related to the global economic outlook. Alcoa is involved in a highly cyclical aluminum industry that is directly related to global recovery and supply and demand. Although aluminum prices have recently been on the rise, a strong economic outlook is uncertain.
The explosion of growth in China over the past ten years has increased the demand for aluminum exponentially; however, with the Chinese government raising interest rates to fight inflation, there is a risk of a sudden drop in demand that could adversely affect aluminum prices. Also, state run aluminum companies in China receive forms of protectionism that make entry and sustainability in China difficult for Alcoa.
The mining and smelting of aluminum is an energy intensive process. Rising energy prices could increase costs and shrink profit margins in the future. Fluctuations in raw material prices and currencies are other major risks as well.
The aluminum industry is extremely competitive as other material metal sub-industries such as steel, iron, plastics and glass fight for market share.
Due to Alcoa’s size and the process of extracting aluminum from bauxite, large amounts of fixed capital are necessary. Alcoa carries large amounts of debt and long term liabilities that could be difficult to meet if demand for aluminum drastically declines.
During the economic recession that officially ended in 2009, Alcoa decide to halt all non-critical capital investment which could decrease long term sales forecasts and increase debt obligations.
Key Points • Extremely cyclical industry • Profits based on global supply and demand • Rising energy prices • Capital intensive • Halted all non-critical capital investment in 2009
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Key Points • Strengths- Increasing aluminum prices motivated by spikes in global demand, financial
strengthening practices since 2009 • Weaknesses- Very cyclical industry, high fixed costs and volatile earnings • Opportunities- More uses for aluminum, aluminum concentrated industries growing and
technological innovation • Threats- Global economic slow down
SWOT Analysis
Strengths
• Largest aluminum company in the world
• Diversified across 10 industries • Leading innovator in the aluminum
industry • Increased global commodity prices • Aluminum Index increased 50%
over past 2 years • $1.1 billion in asset disposition in
2009 • Cash sustainability program • Dividend reduction program • 13.7% YoY increase in sales in
2010
Opportunities • New uses for aluminum across
broad range of markets • Increasing Smartphone/technology
market • Growth of China and emerging
BRIC markets • Global presence to take advantage
of increased global demand • Technological innovation • Global stance on social
responsibility
Weaknesses • Aluminum is highly cyclical
industry • Subject to global
supply/demand/economy • Capital intensive • High fixed costs • Volatile short term earnings and
revenues
Threats • Technological innovation creating
more uses for other metals and glasses
• Highly competitive industry • Global economic slow down • Currency and commodities risk • Litigation risk • Political Risk in BRIC countries
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Cash Sustainability Program By early 2009, the price of aluminum had dropped more than 50% since its peak in
2008. Alcoa and other companies in the materials industry had to make significant changes to fight the huge drop in material prices. In an attempt to hold on to market share Alcoa implemented a Cash Sustainability Program. Alcoa set out seven financial and operational goals that were aimed at strengthening Alcoa’s balance sheet, restoring liquidity, and making Alcoa’s free-cash-flow neutral by the end of 2009. Alcoa applied the following financial levers:
• Divested low growth assets and businesses where Alcoa had a small market share • Redeemed their shares in Rio Tinto for a premium • Focused on completing those projects that lowered cost position and provided the
greatest opportunity for future growth • Curtailed additional refinery and smelter capacity and halted non-critical capital
expenditures • Instituted programs to identify procurement efficiencies, overhead rationalization,
and working capital improvements • Reduced the quarterly common stock dividend • Issued new equity and debt instruments • Reduced global headcount • Suspended its existing share repurchase program
The following box outlines the operational and financial achievements that were recognized as a result of the Cash Sustainability Program.
Alcoa reshaped the Company’s portfolio so that today roughly 90% of their businesses hold the #1 or #2 competitive position in their markets.
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Macroeconomic Conditions
Recovery
Jeffery Lacker, President of the Richmond Fed, has been more optimistic about the U. S. economic recovery than most of his peers. He estimated the economic output in America could increase by 4% in 2011 stimulating growth in the job market. He also stated that the Fed should review the implementation of QE2 because additional funding may not be necessary if positive economic growth does not stagnate. Market conditions for material metals such as steel and aluminum have been improving fueled by the increase in global consumption. Experts predict steel demand to rise 15% in the US in 2011 and 6-7% in Europe and China. The expected growth is likely to come from the rebounding auto, aerospace and technology industries. Inflation Expectations
Lately investors have started to show signs of concern over future inflation. There has been a recent upward trend in raw-material costs. Commodity prices in general have increased by 25% since mid-August. This could lead to inflation if companies start to pass on their rising raw material costs to consumers. Interest rates have also been increasing as economies around the world recover. According to Morningstar.com the spread between long and short term Treasury yield is currently at its widest margin ever, a clear indication of investors’ inflationary concerns. Employment
The Government Employment Report from the Federal Reserve stated that the economy added 36,000 jobs in January. This number may be understating the actual growth in the job market because economists believe this was due to people leaving the labor force. According to experts bad weather played a part in job destruction. Weather mostly affects the construction, transportation and courier sectors all of which showed a decrease in employment for January.
US Economic Statistics
Notes
GDP $14.72T(2010est.) RGDP Increased 2.8%, -2.6% & 0% in 2010, 2009 &2008
2 Yr T-Bill Yield 0.76%/yr 30 Yr T-Bond Yield
4.70%/yr
Unemployment 9.0% Economist claim the drop is due to discouraged workers
Inflation 1.4% -0.3% in 2009 Trade Deficit $633B (2010est.) $1.563T Imports $1.046T Imports. Deficit=3.6% of
GDP Budget Deficit $1.171T(fiscal 2010
est.) 11.62% of GDP
Total Gov. Debt $14.078T
Key Points • American Economic outlook has improved and jobs are returning • Inflation is a possibility if companies pass on rising raw material costs
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Sales Demographics
Alcoa revenue is generated through its Flat-Rolled Products, Primary Metals, and
Engineered Products and Solutions segments. They are currently working on growing there Alumina segment. Their recent acquisition of the Aerospace fastener company, Trans-Digm’s should add value and create more opportunities in the Aerospace industry. An overwhelming majority of Alcoa’s sales occur in the United States. However, Alcoa has re focused their efforts in emerging markets to take advantage of potential growth opportunities. For example, Alcoa has partnered with COMAC to design the largest air plane produced in China. In addition, Alcoa has created a lighter, more fuel efficient hauler for sugar cane farmers in Brazil. The new focus on emerging markets will help diversify Alcoa’s revenue outside the United States.
Key Points
• Sales are diversified across many different market segments • A focus on emerging markets should further diversify sales outside of the United
States • Acquisition of TransDigm’s will allow for integration across the Aerospace
segment
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Emerging Markets
Alcoa is well positioned to take advantage of the growing middle class in developing countries such as China, Brazil, India and South Korea. The growing middle class will increase demand for housing and transportation in the next few years. This will give Alcoa the oppurtunity to enjoy top line sales growth.
• China’s 2010 GDP was $9.87 trillion and real GDP has grown at rates of 9%, 9.1% and 10.3% over the past three years. China’s Industrial Production increased by an estimated 11% in 2010 up from 9.3% in 2009. The industrial sector makes up 27.2% of China’s total GDP.
• India’s 2010 GDP was $4.04 trillion and has had real GDP growth rates of 7.4%, 7.4% and 8.3% over the past three years. India’s Industrial Production increased by 9.3% in 2010 and the industial sector makes up 28.6% of India’s total GDP.
• Brazil’s 2010 GDP was 2.09 trillion and has had real GDP growth rates of 5.1%, -0.2% and 7.5% over the past three years. Brazil’s Industrial Prodution increased by 11.5% in 2010 and the industrial sector makes up 26.4% of total GDP.
• South Korea’s 2010 GDP was $1.47 trillion and has had real GDP growth rates of 2.3%, 0.2% and 6.1% over the past three years. South Korea’s Industrial Production increased by 12.1% in 2010 and the industrial sector makes up 39.4% of the total GDP.
The chart above shows the high positive correlation between indices which mimic
commodity prices and the equity markets in emerging economies. The correlation shows a belief that as emerging markets grow, their demand for commodities will grow.
Key Points
• Alcoa is in position to profit from emerging middle class • Emerging market grow correlates with commodity prices
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Industry Analysis
The aluminum industry is highly cyclical, with prices subject to worldwide market forces of supply and demand and other influences. As a result, cyclical fluctuations in LME prices and economic conditions greatly affect aluminum end-use markets. However, many analysts agree that the fundamental outlook for the aluminum sub-industry looks positive for 2011.
According to Standard and Poor’s estimates, the average price of aluminum is predicted to rise to $1.15 a pound in 2011, from 2010's average price of $0.99. The basis for predicting a rise in the price of aluminum comes from the following assumptions:
1. The global economy will continue to grow and so will GDP in 2011. 2. There will be a sustained upturn in several key markets (BRIC countries and the
United States) which will likely result in higher demand for aluminum in 2011. 3. The materials segment is expected to outperform the market and the Aluminum
Index is predicted to outperform the materials segment. Year to date to January 7, the S&P
Aluminum Index rose 6.3%, compared to a 1.0% gain for the S&P 1500
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Composite Index and a 0.3% decline in the S&P Materials Index.
4. S&P expects that both U.S. housing and car sales will rise 14% in 2011. 5. Improved economic conditions in China will ultimately result in increased
internal consumption and lower exports. The rising costs for power, along with the Chinese government's desire to curtail investment in the aluminum industry, will trim output and lead to lower exports over the long term. In 2009, China's production fell for the first time since 1995, and the country was a net importer of aluminum for the first time since 2001.
6. Government concern for the environment has stimulated a strong interest in expanded use of aluminum by the automotive industry as well as a strong focus on recycling.
Key Points • Price of aluminum is predicted to rise • Demand for aluminum in the BRIC
countries as well as the U.S. is predicted to rise
• China’s government is looking to curtail investment in the aluminum industry which will lead to lower exports by Chinese aluminum suppliers
• Concern for the environment has resulted in the incorporation of more aluminum in various industries
How is Alcoa affected? • For every 100 dollar change in the price of aluminum, Alcoa is affected by a 200 million dollar
change in revenue. Alcoa’s profits will increase as the price of aluminum rises. • Alcoa’s image concerning social responsibility remains top notch as Alcoa has once again
achieved the top spot in the Basic Resources category in the annual Covalence Ethical Rankings. A majority of governments will be more willing to work with Alcoa than their less responsible competitors.
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Mitigating the Risk of Rising Energy Costs Alcoa Energy is a global producer, controlling more than 3 GW of generating
capacity to provide for the energy needs of Alcoa’s smelting and refining system as well as the needs of regional wholesale markets. The business includes Alcoa Power Generating Inc, which operates North American Energy assets, as well as partnership positions in Australia, Brazil, Suriname and Jamaica. Alcoa Energy is actively developing new energy assets to increase Alcoa’s energy self-sufficiency and grow the company’s energy portfolio. Alcoa Energy generates approximately 22% of the power used at its smelters and purchases the remaining power using long term contracts. Some of Alcoa’s contracts involve partnerships with subsidiaries or companies in which Alcoa has a large stake. Alcoa purchases long term energy contracts that last anywhere from 10 to 40 years. In the United States, Alcoa owns many of the mines from which it uses to generate electricity. 66% of Alcoa’s smelters are already tied into hydropower plants which serve as a renewable energy source. As new plants are opening and staring to generate revenue, Alcoa is seeing the savings from these renewable sources increase.
Competitors
POSCO (NYSE: PKX )Based out of South Korea, POSCO engages in the manufacture and sale of various steel products in South Korea and internationally. It offers steel for structures used in steel structures, bridges, ships, and automobiles; atmospheric corrosion resistant steel for used in the production of containers,
special vehicles, and building structures; hot rolled steel used in automobile frames and wheels; and hot rolled steel for special applications. The company also provides cold-rolled sheets used in cold-rolled products and steel pipes.
Arcelor Mittal (NYSE: MT )Formally known as Mittal Steel Company, Arcelor Mittal is based out of Luxembourg. Arcelor Mittal is the leader in all major global steel markets, including automotive, construction, household appliances and packaging, with leading R&D and technology, as well as sizeable captive
supplies of raw materials and outstanding distribution networks. Arcelor Mittal engages in the production and marketing of finished and semi-finished carbon steel and stainless steel products worldwide. It offers flat products, including sheet and plate; and long products comprising bars, rods, and structural shapes, as well as pipes and tubes.
United States Steel Corporation (NYSE: X )Headquartered in Pennsylvania, United States Steel Corporation is an integrated steel producer with major production operations in the United States, Canada and Central Europe. With an annual raw steelmaking capability of 31.7 million net tons, USS manufactures a wide range of value-added steel sheet and tubular products for the automotive,
appliance, container, industrial machinery, construction, and oil and gas industries. The company operates through three segments: Flat-rolled Products, U. S. Steel Europe, and
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Tubular Products. The Flat-rolled Products segment offers slabs, rounds, strip mill plates, sheets, and tin mill products.
Aluminum Corporation of China Ltd. (NYSE: ACH) Founded in 2001, Aluminum Corporation of China Limited engages in the exploration and mining of bauxite, as well as production and sale of alumina, primary aluminum, and aluminum fabricated products in the People’s Republic of China
and internationally. The company’s Primary Aluminum segment engages in purchasing alumina and other raw materials, supplemental materials, and electricity power; smelting alumina to produce primary aluminum; selling primary aluminum products; and producing and selling carbon products and aluminum-alloy products.
Why these Competitors? Alcoa is a vertically and horizontally integrated company who has its hand in
every part of the aluminum process and market. From the mining of bauxite to the recycling of aluminum cans, the magnitude of Alcoa’s operations reaches far and wide. As a result, it is difficult to find direct competitors who operate within the same industry and on the same scale as Alcoa. The Aluminum Corporation of China Limited is one of the only publically traded companies that we believe represents a direct competitor. However, because ACH is a relatively new company, historical data was not available and therefore not meaningful for our valuations. So for our comparables we used companies who were industry leaders in the steel sector. These comparables provided us with historical data and the businesses operate on relatively similar scales as Alcoa. Both steel and aluminum also compete for market share in every market segment. Steel is also a cyclical industry that relies heavily on commodity price.
What sets Alcoa apart from its competitors?
Largest aluminum company in the world Persistent social responsibility that leads to strong customer loyalty Push towards more efficient and lighter products in mid-stream industries such as
aerospace and automobiles is giving aluminum the advantage over steel
Key Points
• Because of Alcoa’s size and diversified range or product segments it is difficult to find direct competitors
• The Steel and Aluminum Sectors compete for market share
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Pro Forma Assumptions
• Sales Growth 2011 (8%)- Sales in 2010 grew by 13.96% and with the global demand for aluminum expected to increase by 15% in 2011. We believe that 8% is a suitable growth rate because though we are optimistic, the threat of global slowdown is still imminent.
• Sales Growth 2012-2014 (7%, 4%, 3%) - Our attitude for the future reflects the consensus of consumer sentiment across the globe that the economy is improving. In 2012, global demand for aluminum should stabilize, with most of the demand coming from emerging markets such as India and Brazil. We think sales will follow a three stage H model beginning in 2011. We predict high growth of 8% in 2011, 7% in 2012 and then a gradual slowdown to Alcoa’s 10 year average sales growth of 3.5%.
• COGS (82% of Sales)- We chose to apply the ratio of 82% of sales to the COGS figure which is slightly lower than the historical average of 83.67%. This is due to the capital restructuring programs implemented in 2009/2010 and increased efficiency within existing operations. Also, the halting of non-critical capital projects and the divestitures of nonperforming assets should decrease COGS into 2011.
• Operating Expenses (10.35% of Sales) – Non recurring expenses have historically counted for 1% to 3% of sales. Therefore, we subtracted 2.83% of sales from the average historical operating expenses of 13.18% of sales to arrive at our total 2011 pro forma operating expenses of 10.35% of sales. We estimate these expenses will be reduced in 2011 compared to 2010 because of capital restructuring and re-evaluation of global operations.
• Marginal Tax Rate (36.1%) – The 4 year historical average of 36.1% is appropriate for our pro forma 2011 tax rate. Alcoa’s marginal tax rate in 2010 was 16%, mainly due to poor performance in 2009.
• Depreciation & Amortization (8% of Sales)- Due to the halting of non-critical capital projects and divestures of non-performing assets, depreciation into 2011 should follow the 2010 trend. This trend is higher than Alcoa’s historical average of 6.15% of sales.
• Average diluted number of shares outstanding (1,021,000,000) – The number of shares outstanding in 2010 is acceptable for forecasting 2011 earnings per share as we do not anticipate management to perform any stock buybacks or issuances.
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2.00% 8.00% 14.00%5,392,740 5,709,960 6,027,1804,422,047 4,625,068 4,821,744
970,693 1,084,892 1,205,436
Operating ExpensesResearch Development 45,838 48,535 51,231Selling General and Administrative 246,448 256,948 268,210Non Recurring 0 0 0Others 269,637 285,498 301,359
Total Operating Expenses 561,924 590,981 620,800
408,770 493,912 584,636
Income from Continuing OperationsTotal Other Income/Expenses Net 53,927 57,100 60,272Earnings Before Interest And Taxes 462,697 551,011 644,908Interest Expense 134,819 142,749 150,680Income Before Tax 327,879 408,262 494,229Income Tax Expense 53,927 57,100 60,272Minority Interest -48,960 -51,840 -54,720
Net Income From Continuing Ops 322,911 403,003 488,677
Non-recurring EventsDiscontinued Operations -28,042 -29,692 -31,341Extraordinary ItemsEffect Of Accounting ChangesOther Items
294,869 373,311 457,336
294,869 373,311 457,336Net Income To Common Shares
Net Income Preferred Stock And Other
Pro Forma 2011
Operating Income or Loss
Total Revenue Cost of Revenue
Gross Profit
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Financial Ratio Analysis
Liquidity: Average
Liquidity 2007 2008 2009 2010 PKX MT X Avg Market Cash Ratio 0.07 0.1 0.27 0.32 1.49 0.26 0.21 0.65 Quick Ratio 0.66 0.67 0.87 1.01 1.67 1.15 1.14 1.32 0.52 Current Ratio 1.13 1.12 1.30 1.50 2.22 1.39 1.91 1.84 0.82
Alcoa has been improving there liquidity over the past 4 years. Part of the large
increase in liquidity came last year when Alcoa redeemed its shares in Rio Tinto at a premium. Alcoa and their peers are more liquid than then an average company in the S&P 500. This is because growth is organic and short-term cash flows are predictable due to hedging against fluctuations in commodity markets. Thus, having cash on hand is not as important as in other industries.
Liquidity Rankings
1st 2nd 3rd 4th 5th Cash Ratio PKX AA MT XX Quick Ratio PKX MT X AA S&P Current Ratio PKX X AA MT S&P
0.00
0.50
1.00
1.50
2.00
2.50
2007 2008 2009 2010 PKX MT X Avg Market
Liquidity
Quick Ratio
Current Ratio
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Asset Management: Average
Asset Management 2007 2008 2009 2010 PKX MT X Avg Market Asset Turnover 0.79 0.71 0.48 0.54 0.73 0.51 1.07 0.77 0.54 Fixed Asset Turnover 1.00 0.91 0.59 0.66 1.24 0.69 1.58 1.17 - Avg Collection Period 36.24 35.16 43.19 40.00 59.39 32.23 45.93 45.85 43.40 Days in Inventory 50.07 53.30 50.27 49.99 60.60 97.67 39.56 65.94 66.36
Since the Aluminum sub-sector of the materials industry is capital intensive, asset management is one the most important responsibilities of the C-Suite. We believe this is one area that Alcoa’s management could improve. That being said a higher rate of asset turnover does not always lead to higher bottom line profits as shown by U. S. steel which dominates asset management yet is incurring losses.
Asset Management Rankings 1st 2nd 3rd 4th 5th Asset Turnover X PKX AA S&P MT Fixed Asset Turnover X PKX MT AA Avg Collection Period MT AA S&P X PKX Days in Inventory X AA PKX S&P MT
0.000.200.400.600.801.001.201.401.601.80
Asset Management
Asset Turnover
Fixed Asset Turnover
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Debt Management: Average
Debt Management 2007 2008 2009 2010 PKX MT X Avg Market Debt Ratio 0.59 0.69 0.68 0.65 0.39 0.52 0.70 0.53 0.60 Debt to Equity Ratio 1.42 2.22 2.09 1.86 0.63 1.09 2.30 1.34 1.50 Avg Payment Period 65.84 61.92 69.62 69.99 48.39 104.15 57.30 69.95 16.10 Times Interest Earned 12.20 2.95 -2.19 1.94 8.03 NMF -10.90 -1.44 16.28
Alcoa’s debt management has been sufficient over the past four years. The Average Payment Period is between 60 and 70 which stayed consistent throughout the recession. This indicates that Alcoa has power over their suppliers and does not have trouble paying off their short term debt. The Debt Ratio and Debt to Equity Ratio could be better but are no reason for concern due to the high fixed costs associated with the materials sector. Alcoa increased their percentage debt in 2008 when the fed reduced interest rates. The higher Debt to Equity Ratio will help multiply return on equity as the economy turns around and demand for materials increases. Alcoa’s credit rating is BBB- and the market value of their debt is 5.35%.
Debt Management Rankings 1st 2nd 3rd 4th 5th Debt Ratio PKX MT S&P AA X Debt to Equity Ratio PKX MT S&P AA X Times Interest Earned S&P PKX AA MT X
0.00
0.50
1.00
1.50
2.00
2.50
Debt Management
Debt Ratio
Debt to Equity Ratio
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Profitability: Above Industry Average
Profitability 2007 2008 2009 2010 PKX MT X Avg Market Net Profit Margin 8.34% -0.28% -6.24% 1.21% 0.07% 0.12% NMF 0.09% 10.87% EBIT Margin 9.69% 4.24% -6.45% 5.13% 10.50% NMF NMF 10.50% 14.84% Gross Profit Margin 21.14% 17.57% 8.34% 18.27% 15.79% 3.37% 6.45% 8.54% 30.91% Return of Assets 6.61% -0.20% -2.99% 0.65% 0.05% 0.06% NMF 0.05% 5.07% Return of Equity 16.01% -0.63% -9.27% 1.87% 0.08% 0.12% NMF 0.10% 13.79%
The materials industry by nature has low margins due to the difficulty in product
differentiation. Material companies have little pricing control and must cut costs in order to increase its margins. High fixed costs and capital expenditures cause profit margins to be low compared to the overall market. From the table above it is apparent that Alcoa can produce a healthy Gross Profit Margin but its non-operating costs need to be monitored to maintain current margins. 2008 and 2009 were clear hiccups as industrial production slowed during the recession.
Profitability Rankings 1st 2nd 3rd 4th 5th Net Profit Margin S&P AA PKX MT X EBIT Margin S&P PKX AA MT X Gross Profit Margin S&P AA PKX X MT Return of Assets S&P AA MT PKX X Return of Equity S&P AA MT PKX X
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2007 2008 2009 2010
Profitability
Net Profit Margin
EBIT Margin
Gross Profit Margin
Return of Assets
Return of Equity
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Extended DuPont Model
DuPont 2007 2008 2009 2010 PKX MT X Net Profit Margin 8.34% -0.28% -6.24% 1.21% 0.07% 0.12% NMF Asset Turnover 0.79 0.71 0.48 0.54 0.73 0.51 1.07 Equity Multiplier 2.42 3.22 3.10 2.86 1.63 2.09 3.30 Return on Equity 16.01% -0.63% -9.27% 1.87% 0.08% 0.12% NMF
From the DuPont model it is apparent that Alcoa has been decreasing its debt since the recession and its biggest fluctuations come from Profit Margin and Asset Turnover. As the economy recovers and industrial production picks up, we anticipate Alcoa to return to its 2007 levels for both components. We also expect Alcoa to keep up its trend of buying back its debt for the foreseeable future lowering its Equity Multiplier.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%
10.00%
2007 2008 2009 2010
Components of DuPont
Net Profit Margin
Asset Turnover
Equity Multiplier
-15.00%-10.00%
-5.00%0.00%5.00%
10.00%15.00%20.00%
2007 2008 2009 2010
Return on Equity
Return on Equity
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Multiples Valuation
The tables and charts below show 10 year historical returns. We feel that 10 years provides a reasonable representation of Alcoa’s history and a good basis for valuation. NOTE: For price to sales, we used the current market price of 17.32 and divided the current price by sales per share that was calculated using 2010 income statement data. NOTE: For price to FCFF we calculated price per share and FCFF per share to arrive at historical P/FCFF multiples. We then calculated the average and used that P/FCFF multiple to calculate expected stock price in 2011.
P/S Valuation
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
AA
PKX
MT
X
Peer Average
Historical P/S Multiple 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010AA 1.33 0.08 1.38 1.10 1.05 0.92 0.89 0.23 0.673 0.81PKX 0.923 0.689 0.82 0.68 0.71 0.99 1.212 0.59 1.097 0.824MT 0.05 0.07 0.17 1.05 0.91 1.12 0.9 0.25 0.9 0.65X 0.28 0.21 0.37 0.42 0.46 0.63 0.71 0.15 0.58 0.47
Peer Average 0.65 0.26 0.68 0.81 0.78 0.91 0.93 0.31 0.813 0.69
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Key Facts • Historical P/S is slightly above peer average. • P/S multiple has increased in 2009 and 2010 but still is below one. • We divided forecasted sales for 2011 in each scenario by 2010 shares outstanding to arrive at our P/S
multiples shown above. • P/S multiple for 2010 is suitable for 2011. • We multiplied our sales/share by our P/S multiple in 2010 and got our expected price in each
situation. We then weighted each scenario accordingly. • Margin of safety = 7.41%
P/B Valuation
0.00
20.00
40.00
60.00
80.00
100.00
120.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
AA
PKX
MT
X
Peer Average
2010 2011Pessimistic Most Likely Optimistic
Sales $21,013,000 21,433,260 22,694,040 23,954,820Shares Outstanding 1,021,400 1,021,400 1,021,400 1,021,400
Sales/Share $20.57 20.98 22.22 23.45P/S 0.84 0.84 0.84 0.84
Price $17.33 17.68 18.72 19.76Weight 100% 20% 60% 20%
Weighted Average $18.72Current Price $17.33
Margin of Safety 7.41%
Price to Sales Projection
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2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
AA
2011Pessimistic Most Likely Optimistic
Book Value per Share $8.48 $8.97 $9.47P/B Multiple 2.08 2.08 2.08
Price per Share $17.63 $18.67 $19.70Probability 0.1 0.6 0.3
$1.76 $11.20 $5.91
Weighted Average Price $18.88Current Price $17.33
Margin of Safety 8.19%
Price to Book Valuation
Historical P/B Multiple 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010AA 12.46 11.69 13.84 15.21 15.30 16.76 19.29 14.6 12.69 13.15PKX 21.05 29.84 31.16 45.39 61.41 77.6 88.83 73.3 86.33 99.35MT 2.66 1.03 1.20 9.10 14.42 30.41 39.88 40.4 43.32 44.9X 28.09 19.78 8.36 32.93 28.57 36.82 46.87 42.1 32.62 31.6
Peer Average 16.07 15.59 13.64 25.66 29.93 40.40 48.72 42.6 43.74 47.25
Key Points • Book value per share of $8.31 was based on 2010 data. • We applied 2011 pro forma growth rates to our 2010 book value to calculate 2011 estimated book
values for each scenario. • 2011 estimated book value per share was multiplied by 2010 calculated P/B multiple resulting in an
estimated price per share. • Margin of safety = 8.19%
EV/EBITDA Valuation
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2011Pessimistic Most Likely Optimistic
EBIT $1,838,974 $2,189,975 $2,563,166D&A $1,714,661 $1,815,523 $1,916,386
EBITDA $3,553,635 $4,005,498 $4,479,551EV/EBITDA Multiple 9.60 9.60 9.60
Enterprise Value $34,114,891 $38,452,781 $43,003,693Total Debt $9,506,400 $10,065,600 $10,624,800
Minority Interest $3,625,000 $3,625,000 $3,625,000Cash $1,530,000 $1,620,000 $1,710,000
Market Cap $22,513,491 $26,382,181 $30,463,893Shares Outstanding 1,021,400 1,021,400 1,021,400
Price/Share $22.04 $25.83 $29.83Probability 20% 60% 20%
$4.41 $15.50 $5.97Weighted Average Price $25.87
Current Price $17.33Margin of Safety 33.01%
EV/EBITDA Valuation
Historical EV/EBITDA Multiple 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
AA 12.38 14.90 10.12 10.18 9.42 7.18 6.59 15.14 8.2 9.6
Key Facts • EBIT for each scenario was taking from 2011 pro forma income statement. • The depreciation and amortization as percent of sales as described in the pro forma assumptions was
applied to calculate EBITDA. • Calculated 2010 EV/EBITDA multiple was used in all 2011 scenarios. • Total debt included short term and long term obligations. • Market capitalization divided by shares outstanding in 2010 resulting in price per share for each
condition. • Margin of safety of 33.01%
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0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Peer Average
S&P 500
X
MT
PKX
AA
Historical P/E Multiple 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010AA 25.30 32.30 21.60 21.50 19.50 10.40 12.4 27.8 N/A 66.28PKX 9.6 9.1 5.20 3.50 3.90 5.7 10.4 9.3 9.8 8.2MT N/A 3.00 8.70 2.70 6.00 6.30 8.3 9.8 N/A 13.8X N/A 26.20 N/A 4.40 6.40 5.70 13.4 6.1 N/A N/A
Peer Average 17.45 17.65 11.83 8.03 8.95 7.03 11.13 13.3 9.8 29.43S&P 500 30.28 22.89 27.65 26.58 26.46 27.2 24.01 15.17 20.52 21.84
P/E Valuation
Pessimistic Most Likely Optimistic
Probablitiy of Outcome 0.25 0.5 0.25Pro Forma EPS $0.82 $1.02 $1.24
P/E Multilpe 12.48 19.94 27.40Value Per Share $10.27 $20.40 $33.91
Weighted Value Per Share $2.57 $10.20 $8.48Fair Value $21.25
Current Price $17.33Margin of Safety 18.44%
Key Facts • Alcoa has been an industry leader in P/E multiples suggesting capital appreciation. • A recent increase in P/E in 2010 was a result of an optimistic economic outlook and increased global
aluminum production. • The base case P/E multiple used is an average of 10 year historical multiples in an effort to reduce the
influence of cyclicality on the valuation. • Margin of safety is 18.44%
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Sales Growth Rate (2011) 8.00%Sales Growth Rate (2012) 7.00%Sales Growth Rate (2013) 4.00%Risk Free Rate 3.68%Beta 2.17Equity Risk Premium 6.00%Perpetuity Growth Rate 3%WACC 9.77%
Base Case Assumptions
RV $32,357PV of RV $22,286
Residual ValueValue 2015
RV=FCFF(1+g)/(WACC-g)
PV of FCFF 11-14 $8,040.94PV of RV $22,286.09Plus: Cash $1,500.00Minus: LT Debt $9,000.00PV Equity $22,827.03Shares Outstanding 1,021Estimated Price $22.35Current Price 17.33Margin of Safety 22.46%
% Debt Cost of Debt (1-Tax Rate) % Equity Cost EquityWACC = 66% 7.38% 0.84 + 34.00% 16.70%WACC = 9.77%
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 E 2011 E 2012 E 2013 E 2014Sales $30,379 $30,748 $26,901 $18,439 $21,013 $22,694 $24,283 $25,254 $26,012EBIT $1,042 $4,892 $1,199 ($1,028) $1,014 $1,112 $1,190 $1,237 $1,275
Tax Rate 24.3% 34.6% 43.2% 38.3% 16.0% 31.3% 31.3% 31.3% 31.3%Depreciation $1,280 $1,268 $1,234 $1,311 $1,451 $1,389 $1,486 $1,546 $1,592
PPE $14,813 $19,827 $17,702 $19,961 $20,015 $20,425 $20,640 $20,203 $19,901PPE % Sales 48.76% 64.48% 65.80% 108.25% 95.25% 90.00% 85.00% 80.00% 76.51%
Net Working Capital $1,876 $920 $871 $1,608 $2,398 $1,477 $1,581 $1,644 $1,693NWC % Sales 6.18% 2.99% 3.24% 8.72% 11.41% 6.51% 6.51% 6.51% 6.51%
EBIT (1-tax rate) $789 $3,199 $681 ($634) $852 $764 $817 $850 $876Plus Depreciation $1,280 $1,268 $1,234 $1,311 $1,451 $1,389 $1,486 $1,546 $1,592
Less Change in NWC $956 $49 ($737) ($790) $921 ($103) ($63) ($49)Less Change in PPE ($5,014) $2,125 ($2,259) ($54) ($410) ($216) $437 $302
FCFF 409 4,089 (2,319) 1,459 2,664 1,985 2,770 2,720 PV of FCFF $2,426.72 $1,646.97 $2,093.89 $1,873.36
Sum of PV of FCFF $8,040.94
DCF Valuation
Key Facts • Used a combination of spreadsheet and 3 Stage H Model to predict cash flows • Estimated FCFF four years in advance • Growth rates stated above were applied throughout calculation • To be conservative we used Alcoa’s highest interest rate on bonds close to maturity as the cost of
debt. • Applied 3% perpetuity growth rate • Margin of safety of 22.46%
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-10
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010
AA
Historical P/FCFF Multiple 2007 2008 2009 2010
AA 70.28 1.56 -5.14 11.6
4 Year Historic Multiple 2011 Pro Forma EPS Implied Stock Price Current Price Margin of Safety
Low -$5.13 $1.37 -$7.03
Average $19.58 $1.37 $26.82 $17.33 35.38%
High $70.28 $1.37 $96.29
P/FCFF
P/FCFF Valuation
Key Facts • We calculated historical P/FCFF multiples by taking historical year end market capitalizations and
dividing by FCFF for that year. • We found the low, average and high multiples from the past four years, then multiplied 2011 pro
forma EPS by the average multiple of 19.58 to get our implied stock price of $26.82 • 2010 multiple suggests strong value on a P/FCFF basis • Margin of safety = 35.35%
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Making Room for Alcoa in the SMF Portfolio
The table below is a risk analysis performed on the Student Managed Fund portfolio with the inclusion of Alcoa. At first glance, Alcoa’s beta of 2.17 may seem rather high and risky compared to the market but the market weighted beta of the SMF portfolio including Alcoa is 1.03. The market weighted beta without Alcoa is 0.97. Due to the diversification of our portfolio, the less risky stocks are able to counter balance the riskier stocks.
Company Sector Market Value Market Weight Beta
S&P 500 ETF
215,903 15.28 0.99 Cerner Corporation IT 100,110 7.08 1.05 FactSet Research Systems. Inc. IT 80,848 5.72 1.32 Oracle Corporation IT 66,480 4.70 1.10 Google, Inc. IT 61,104 4.32 1.13 Activision Blizzard, Inc. IT 39,610 2.80 0.55 Research in Motion IT 54,360 3.85 1.85 Xerox Corp IT 51,136 3.62 1.65 Stericycle Industrials 71,730 5.08 0.22 L-3 Holdings Industrials 51,272 3.63 0.93 Diana Shipping, Inc. Industrials 27,002 1.91 1.57 Curtiss-Wright Corporation Industrials 17,710 1.25 1.21 Occidental Petroleum Corporation Energy 98,930 7.00 0.98 Goldman Sachs Group, Inc. Financials 41,332.5 2.92 1.26 The NASDAQ OMX Group,Inc Financials 37,995 2.69 0.82 Wells-Fargo & Company Financials 13,376 0.95 1.46 Teva Pharmaceutical Industries Health Care 44,624 3.16 0.20 Quest Diagnostics, Inc. Health Care 34,200 2.42 0.62 PetMed Express, Inc. Consumer Discretionary 30,100 2.13 0.44 Toyota Motor Corp Consumer Discretionary 54,119 3.83 0.70 Mosaic Company Materials 83,880 5.94 1.18 Ball Corporation Materials 36,245 2.56 0.56 Alcoa Materials 71,725 5.00 2.17 Cash and Cash Equivalents - 29,490 2.09 - Total - 1,413,281 100 - SMF Market Weighted Beta 1.03
The table above also provides information on the diversification of SMF’s
portfolio. With the inclusion of Alcoa, the Materials sector accounts for 13.5 percent of the portfolio. However, zero percent of SMF’s portfolio is weighted in the aluminum subsector. We believe that as the economy recovers, the aluminum industry will outperform the S&P 500.
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Economic Value Added
Economic Value Added Shares Outstanding $1,021,400,000 Share Price $17.33 MV of Equity $17,700,862,000 Long Term Debt $9,000,000,000 Total Capital $26,700,862,000 % of Debt 66.00% % of Equity 34.00% Long Term Bond Yield 5.35% Tax Rate 16.00% Cost of Debt 7.38% Risk Free Rate 3.68% Expected Market Premium 9.68% Risk Premium 6.00% Beta 217.00% Cost of Equity 16.70% WACC 9.77% NOPAT $254,000,000 Beginning BV of Capital $9,320,000,000 Return on Capital 2.73% Spread (ROC-WACC) -7.04%
EVA
(656,128,000.00) EVA per share -$0.64
Is Management Destroying Value? In 2009, Alcoa implemented its cash sustainability program in order to fight the substantial drop in aluminum prices and weather the recession. We wanted to see if management has created value since the plan was implemented. The calculation resulted in a negative spread of (7.73%). Although this implies that management has destroyed value since 2009, we believe that this is not representative of what management is doing at Alcoa. In 2007, Alcoa began taking on large long term investment projects which required substantial amounts of CAPEX. These investments are just starting to generate revenue. Therefore the gains are just starting to be realized from the large expenditures. We believe that within the year 2011, we will see a decrease in the negative spread as Alcoa capitalizes on its investments.
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Investor Relations Phone Call with Roy Harvey Alcoa’s Director of Investor Relations on 02/07/2011 What about Alcoa makes it a good buy now? Prior to the recession, Alcoa invested in a substantial amount of projects that are just starting to generate cash. In the last couple of years we were spending more than we were generating. The low demand for aluminum also drove down the price of the stock. However, now we are starting to realize gains from our earlier investments and we have set aggressive three year targets which we believe will increase shareholder value. We are also working hard to make sure that analysts understand the fundamentals of our business. We want them to understand how we generate profits within our three revenue streams. These revenue streams consist of an upstream segment, a midstream segments, and a specialized segment. Our upstream segment consists of bauxite mining, smelting, and refining. We have set the most aggressive targets for this segment in order to drive down our cost curves. Our midstream segment consists of mostly beverage cans and automobile parts. We are predicting an additional 2.5 billion in revenue growth over the next three years which will strengthen our margins. In our specialized segment, which focuses mostly on aerospace, we are predicting an additional 1.6 billion in revenue growth over the next 3 years. As the economy recovers, which Alcoa segments will see the most growth? We will definitely see a substantial amount of growth in the specialized segment. Aerospace technology has begun to shy away from hard plastics and has begun to rely more on aluminum. As the economy turns around, demand for industrial turbines is increasing. There are also advancements in the automotive industry which use aluminum to bring down the weight of cars. Alcoa is also the market leader in aluminum mining in Russia. What is Alcoa’s strategy to decrease the current level of debt? When approaching the use of cash flow we focus on sustaining capital, wisely investing our cash and paying down our debt. What Alcoa’s growth strategy for the upcoming year? The next 5 years? We trimmed a lot of our operations during the recession so as markets improve we can refill our production capacity and turn excess capacity into higher margins. In which markets is growth being focused on? Aerospace and automotive industries provide for huge opportunities and innovations. We also made an early move into Brazil creating a large asset base. How do you mitigate political risks in the BRIC countries? We get into countries where we can manage risks and form partnerships with local governments or major market participants.
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What methods or metrics are used to determine whether to divest of or acquire assets? Our goal is to be #1 or #2 in each of the markets we compete in. So we look for acquiring strong positions with companies in which we will be able to build on the customer connections that we already have. We also only acquire businesses that we believe we can run better and more efficiently than the current managers. That’s the Alcoa advantage. We can run businesses better than others can! What is Alcoa’s competitive advantage? Our ability to play a game that’s environmentally friendly and ethical allows us to put in the right kind of controls so we can minimize our footprint and work with governments which in turn translate to growth in shareholder value. Our goal is to give our customers what they want before they even think about it. What are Alcoa’s biggest risks? Commodity risk has a huge effect on bottom line. For every 100 dollar change in the price of aluminum we are affected by a 200 million dollar change in revenues. Other commodity prices in energy or fuel oil can also have a big effect on cost basis. So if energy prices increase we see shrinking margins that affect cash flows. Alcoa is a fairly mature and large company. How does the company plan to maintain growth? Is it external growth or internal? Our main focus is on internal growth and turning capital expenditures into cash. We are starting to see the generation of revenue from the capital expenditures we took on in the past couple of years. However, if an opportunity presents itself are not averse to taking on small acquisitions. Are there any new developments such as technology that will negatively or positively affect the aluminum industry? If so, how will Alcoa adapt to the changes? We believe that Alcoa is far ahead of our competition in terms of technological innovation. We work hard to not only create innovation internally but to also actively integrate new technology within our various segments. Many of the new products that could drastically change the way aluminum is refined remain in the early stages of development; therefore any technological developments will not be realized for a substantial amount of time. However, we continue to keep a close eye on continuing developments. Are there any legislative acts on the horizon that are potentially threatening to the aluminum industry? There are currently no legislative acts that pose severe threats to Alcoa. The process of refining aluminum actually results in very low direct emissions. It is in the indirect emissions that Alcoa faces higher carbon costs. However, 66% of Alcoa’s smelters are already tied into hydropower plants which serve as a renewable energy source. Some of our newest plants, which include Iceland and Brazil run off of hydropower and as a result we are able to get a competitive price and minimize our carbon foot print.
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Recent News
02/07/2011 Alcoa’s New Tactic in Dam Dispute: Charm Alcoa is battling to maintain licensing rights to the four dams it built nearly 100
years ago to help power an aluminum smelter in the area. With the smelter now closed and the jobs long gone, North Carolina wants the rights to the 38-mile stretch of the Yadkin River controlled by the dams back. Alcoa's 50-year license to those rights has expired, and it's fighting to renew it. The political equation -- already tense -- is in some ways even more combative. Alcoa beat back a bill in 2009 that would have created a state trust to operate the dams. Legislators responded last year by approving the formation of a regional development commission focused on the counties around the dams. 02/02/2011 Alcoa Best in Class in Covalence Ethical Reputation Ranking
Alcoa announced today it again has achieved the top spot in the Basic Resources category in the annual Covalence Ethical Rankings, a major international survey that measures the ethical performance of multinational companies. Covalence’s reputation index, distributed by Thomson Reuters, Bloomberg and Capital IQ, is a barometer of how multinationals are perceived in the ethical field, and measures performance across a range of criteria such as labor standards, waste management, product social utility and human rights policy. 01/31/2011 Alcoa to Acquire TransDigm’s Aerospace Fastener Business
Alcoa announced today it has agreed to purchase the aerospace fastener business of TransDigm Group Inc., a leading global designer, producer and supplier of highly engineered aircraft components. The new business will become part of Alcoa Fastening Systems. The transaction is valued at approximately $240 million and is expected to be earnings and cash flow accretive in the first year. “This acquisition is an important step for Alcoa Fastening Systems (AFS), said Vitaliy Rusakov, President, Alcoa Fastening Systems. “It is a part of our strategic plan to accelerate the growth of our business, add efficiencies, broaden our technology base and expand our product offering to better serve our customers and increase shareholder value. The TransDigm global aerospace fastener business offers a strong portfolio of complementary products and is well known in the aerospace industry for producing highly engineered precision fastening solutions used for critical airframe, engine and equipment applications.” 01/21/2011 Alcoa Announces Dividend and Stock Contribution to Pension Plans
The Board of Directors of Alcoa declared (a) a quarterly common stock dividend of 3 cents per share payable February 25, 2011 to shareholders of record at the close of business on February 4, 2011 and (b) a quarterly dividend of 93.75 cents per share on Alcoa’s $3.75 cumulative preferred stock payable April 1, 2011 to shareholders of record at the close of business on March 11, 2011. In addition, a contribution was authorized of up to $600 million in Alcoa common stock to the company’s defined benefit pension plans. The company expects to complete the contribution in the first quarter of 2011. The stock contribution will improve the funded status of Alcoa’s pension plans and provide financial flexibility. The company will make additional cash contributions of approximately $300 million in 2011 to improve the funded status of its plans.
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P/E P/S P/B EV/EBITDA DCF P/FCFFValuation Price $21.25 $18.72 $18.88 $25.87 $22.35 $26.82
Weight 15% 15% 20% 15% 20% 15%$3.19 $2.81 $3.78 $3.88 $4.47 $4.02
Weighted Valuation Price
Current Price
Margin of Safety
2011 Target Price
$22.14
$17.33
21.74%
$86.62
$55.50
$69.00$76.37
$83.56
$69.69
$36.74$35.85
$19.77
$34.18$29.51
$31.50$32.50 $33.90
$7.39
$12.73$16.57
$22.14
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Target Price
After completing the valuations we calculated a target price of $22.14. This price was calculated by weighting each valuation based on our judgment of the accuracy of the valuation. Our P/E valuation we weighted as 15% because we had to annualize historical P/E multiples to reduce the effect of cyclicality on the valuation. For our P/S valuation we weighted it as 15% because of revenue volatility. There has been large fluctuations in revenues since the economic recession which has drastically influenced Alcoa’s multiples, reducing the accuracy of multiple valuations. EV/EBITDA and P/FCFF valuations were weighted 15% because though these are more accurate valuation techniques, they yielded the two highest fair value prices and to remain conservative in our estimates we decided this was the best course of action. However, we feel that P/B and DCF provide the best estimates of fair value because they are valuations of a company’s intrinsic value, which is why we weighted these 20%.
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Recommendation
As a group we believe that Alcoa is a great buy because of its 120 years of experience, dominance in the aluminum market and stronger economic outlook expected for 2011. We think that Alcoa is in a good position to take advantage of rising commodities prices, growth in emerging markets and technological advances in other industries requiring aluminum based products. Alcoa’s diversification across ten business segments provides protection against an economic slowdown. This broad reaching strategy provides Alcoa with many growth opportunities and hedging techniques. Through their capital restructuring programs, debt management programs and divestures of underperforming subsidiaries, Alcoa has strengthened their financial statements, adding value to all shareholders. Alcoa has proven that they can withstand the economic recession and have since returned to profitability in 2010. Alcoa’s future is bright. Aluminum is the second largest metal produced in the world and its demand is expected to increase by 15% in 2011. Therefore, we believe Alcoa is a GREAT BUY!
We Recommend Buying 3,000 shares at $17.33/share for a NAV of $51,990
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Appendix
Alcoa Earnings Surprise and Top Holders
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Alcoa is a large company but its management has a significant financial stake in its well being. There has been some recent selling by insiders but nothing to be alarmed about. We believe that management is cashing in on some profit caused by positive earnings reports and diversifying their own portfolios.
Alcoa Transactions
• Adopted relative selling Price Method instead of Fair Value accounting for valuing assets
o Goes into effect January 1, 2011 • Asset impairments of $46 m ($29 after tax) • In the 2010 first quarter, management approved the permanent shutdown and
demolition of the following structures, each of which was previously temporarily idled for different reasons: the Eastalco smelter located in Frederick, MD (capacity of 195 kmt-per-year), the smelter located in Badin, NC (capacity of 60 kmt-per-year), an aluminum fluoride plant in Point Comfort, TX, a paste plant and cast house in Massena, NY, and one potline at the smelter in Warrick, IN (capacity of 40 kmt-per-year). This decision was made after a comprehensive strategic analysis was performed to determine the best course of action for each facility. Factors leading to this decision included current market fundamentals, cost competitiveness, other existing idle capacity, required future capital investment, and restart costs, as well as the elimination of ongoing holding costs. The asset impairments of $128 represent the write off of the remaining book value of properties, plants, and equipment related to these facilities.
• 5,400 out of 6,000 employees have been laid off since 2009 o 600 remaining to be laid of 1st quarter 2011
• On March 31, 2009, Alcoa completed a non-cash exchange of its 45.45% stake in the Sapa AB joint venture for Orkla ASA’s 50% stake in the Elkem Aluminium ANS joint venture. The exchange transaction resulted in the recognition of a $188 gain ($133 after-tax) in the first quarter of 2009. In the 2010 first quarter, the purchase price allocation was finalized based on the completion of a valuation
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study resulting in goodwill of $48 (half of which is deductible for U.S. income tax purposes) and a corresponding reduction in properties, plants, and equipment.
• On June 15, 2009, Alcoa completed the divestiture of the wire harness and electrical portion of the EES business to Platinum Equity, effective June 1, 2009. Alcoa recognized a loss of $129 ($168 pretax) in discontinued operations in 2009 for this transaction. In the 2010 first quarter, Alcoa recognized an additional loss of $6 ($9 pretax) in discontinued operations as a result of a contract settlement with a former customer of this business (see Note C).
• In April 2010, Alcoa completed the divestiture of the Transportation Products Europe business, the assets and liabilities of which were classified as held for sale in 2008 (see Note C), to two separate buyers. Combined, this business sold for $11, which was included in Proceeds from the sale of assets and businesses on the accompanying Statement of Consolidated Cash Flows; no gain or loss was recognized. One of the two transactions is subject to certain post-closing adjustments as defined in the 14 purchase agreement. This business generated sales of $78 in 2009 and, at the time of divestiture, had approximately 360 employees at three locations.
• On July 30, 2010, Alcoa completed an acquisition of the commercial building and construction business of a privately-held company, Traco, for $77. This business, located in Cranberry, Pennsylvania, employing 650 people, is a premier manufacturer of windows and doors for the commercial building and construction market and generated sales of approximately $100 in 2009. The assets and liabilities of this business were included in the Engineered Products and Solutions segment as of the end of July 2010 and this business’ results of operations were included in this segment since the beginning of August 2010. Based on the current purchase price allocation, goodwill of $31 was recorded for this transaction, all of which is deductible for income tax purposes.
• On August 1, 2010, Alcoa repaid the $511 of outstanding principal of its 7.375% Notes as scheduled using available cash on hand.
• Pending formal notification from the Italian Government, Alcoa estimates that a payment in the range of $300 to $500 will be required during 2010 or 2011. In late 2009, after discussions with legal counsel and reviewing the bases on which the EC decided, including the different considerations cited in the EC decision regarding Alcoa’s two smelters in Italy, Alcoa recorded a charge of $250, including $20 to write-off a receivable from the Italian Government for amounts due under the now expired tariff structure. On April 1
• Alcoa Alumínio (Alumínio), a wholly-owned subsidiary of Alcoa, is a participant in several hydroelectric power construction projects in Brazil for purposes of increasing its energy self-sufficiency and providing a long-term, low-cost source
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of power for its facilities. Two of these projects, Machadinho and Barra Grande, were completed in 2002 and 2006, respectively.
• Alumínio committed to taking a share of the output of the Machadinho and Barra Grande projects each for 30 years at cost (including cost of financing the project). In the event that other participants in either one of these projects fail to fulfill their financial responsibilities, Alumínio may be required to fund a portion of the deficiency. In accordance with the respective agreements, if Alumínio funds any such deficiency, its participation and share of the output from the respective project will increase proportionately.
• In 2004, Alcoa acquired a 20% interest in a consortium, which subsequently purchased the Dampier to Bunbury Natural Gas Pipeline (DBNGP) in Western Australia, in exchange for an initial cash investment of $17 (A$24). The investment in the DBNGP was made in order to secure a competitively priced long-term supply of natural gas to Alcoa’s refineries in Western Australia.
Meet Alcoa’s C-Suite
Klaus Kleinfeld, 52, Director, President and Chief Executive Officer. Mr. Kleinfeld was elected to Alcoa’s Board of Directors in November 2003 and was elected President and Chief Executive Officer of Alcoa on May 8, 2008. He was President and Chief Operating Officer of Alcoa from October 1, 2007 to May 8, 2008. Mr. Kleinfeld was President and Chief Executive Officer of Siemens AG from January 2005 to June 2007. He served as Deputy Chairman of the Managing Board and Executive Vice President of Siemens AG from 2004 to January 2005. He was President and Chief Executive Officer of Siemens Corporation, the U.S. arm of Siemens AG, from 2002 to 2004, and was Chief Operating Officer of Siemens Corporation from January to December 2001. Prior to his U.S. assignment, Mr. Kleinfeld was Executive Vice President and a member of the Executive Board of the Siemens AG Medical Engineering Group in Germany from January to December 2000. William F. Christopher, 55, Executive Vice President – Alcoa and Group President, Engineered Products and Solutions. In January 2003, Mr. Christopher assumed responsibility for Alcoa’s global automotive market and since September 2002, has been Group President for Alcoa’s Aerospace and Commercial Transportation Group. He also led the customer and marketing initiatives for growth for the company until January 2006. In 2001, he assumed responsibility for the global deployment of the Alcoa Business System and the company’s customer and quality initiatives. Mr. Christopher was elected a Vice President of Alcoa in 1999 and Executive Vice President in 2001. He was President of Alcoa Forged Products from 1996 to 2001. Nicholas J. DeRoma, 63, Executive Vice President, Chief Legal and Compliance Officer. Mr. DeRoma was elected to his current position effective August 3, 2009 upon joining Alcoa. He was Chief Legal Officer of Nortel Networks Corporation
Page | 38
based in Canada from 2000 until his retirement in September 2005. Before joining Nortel in 1997, he was employed by International Business Machines Corporation (IBM) from 1972 to 1997, holding a series of increasingly challenging assignments in Europe, Asia and North America, including serving as Assistant General Counsel of IBM from 1993 to 1995 and as General Counsel of IBM North America, IBM’s largest business unit, from 1995 to 1997. Charles D. McLane, Jr., 56, Executive Vice President and Chief Financial Officer. Mr. McLane was elected an Alcoa Executive Vice President in September 2007 and was elected Vice President and Chief Financial Officer of Alcoa in January 2007. He was elected Vice President and Corporate Controller in October 2002. He joined Alcoa in May 2000 as director of investor relations, following Alcoa’s merger with Reynolds Metals Company. He became Assistant Treasurer of Reynolds in 1999 and Assistant Controller of that company in 1995. Bernt Reitan, 61, Executive Vice President – Alcoa and Group President, Global Primary Products. Mr. Reitan was named Group President, Global Primary Products in October 2004 and was elected an Alcoa Executive Vice President in November 2004. He was named Group President, Alcoa Primary Products in January 2004. He was elected Vice President of Primary Metals in 2003. He was named President of Alcoa World Alumina and Chemicals and was elected a Vice President of Alcoa in July 2001. He joined Alcoa in 2000 as general manager of Alcoa World Alumina in Europe. Before joining Alcoa, Mr. Reitan held a series of positions with Elkem in Norway over a twenty-year period, serving as Senior Vice President of Materials and Technology and managing director of Elkem Aluminium ANS from 1988 to June 2000. J. Michael Schell, 62, Executive Vice President – Business Development. Mr. Schell was elected Executive Vice President – Business Development and Law effective May 8, 2008 when he joined Alcoa and Chief Compliance Officer of Alcoa effective July 18, 2008. He has been Executive Vice President – Business Development of Alcoa since August 3, 2009. He was Vice Chairman of Global Banking of Citigroup Inc. from mid-2005 until he joined Alcoa. He was a mergers and acquisitions lawyer with Skadden, Arps, Slate, Meagher & Flom LLP from 1979 to mid-2005, being elected a partner of that firm in 1984. He was an attorney with Cadwalader, Wickersham & Taft from 1976 to 1979. Tony R. Thene, 49, Vice President and Controller. Mr. Thene was elected to his current position effective January 18, 2008. He joined Alcoa in 1989 and served in a series of financial management positions from that time to his most recent appointment. He was director of investor relations of Alcoa from January 2006 to January 2008. He served as chief financial officer of Alcoa’s Global Mill Products from November 2004 to January 2006. He became vice president, finance, of Alcoa World Alumina and Chemicals in 2002 and was manager of Alcoa’s corporate
Page | 39
financial analysis and planning group in 2001. He served as division controller for the Alcoa Forging business from 1998 to 2001. Helmut Wieser, 56, Executive Vice President – Alcoa and Group President, Global Rolled Products, Hard Alloy Extrusions & Asia. Mr. Wieser was elected an Alcoa Executive Vice President in November 2005 and was named Group President, Global Rolled Products, Hard Alloy Extrusions and Asia at that time. Mr. Wieser was named Group President, Mill Products Europe/North America in October 2004 and was elected a Vice President of Alcoa in November 2004. He joined Alcoa in October 2000 as Vice President of Operations in Europe and in 2004 he became President of Alcoa’s flat rolled products business in Europe. Before joining Alcoa, Mr. Wieser worked for Austria Metall Group, where he was an executive member of the board and chief operating officer from 1997 to 2000.
3
PART I – FINANCIAL INFORMATION Item 1. Financial Statements. Alcoa and subsidiaries Statement of Consolidated Operations (unaudited) (in millions, except per-share amounts)
Third quarter ended September 30,
Nine months ended September 30,
2010 2009 2010 2009 Sales (K) $ 5,287 $ 4,615 $ 15,361 $ 13,006 Cost of goods sold (exclusive of expenses below) 4,413 3,888 12,636 11,997 Selling, general administrative, and other expenses 232 234 679 718 Research and development expenses 40 39 124 118 Provision for depreciation, depletion, and amortization 358 342 1,079 942 Restructuring and other charges (D) 2 17 219 168 Interest expense 139 120 376 349 Other expenses (income), net (J) 43 (123) 48 (182)
Total costs and expenses 5,227 4,517 15,161 14,110 Income (loss) from continuing operations before income
taxes 60
98 200
(1,104) (Benefit) provision for income taxes (N) (49) (22) 92 (437) Income (loss) from continuing operations 109 120 108 (667) Income (loss) from discontinued operations (C) – 4 (8) (155) Net income (loss) 109 124 100 (822) Less: Net income attributable to noncontrolling interests 48 47 104 52 NET INCOME (LOSS) ATTRIBUTABLE TO ALCOA $ 61 $ 77 $ (4) $ (874) AMOUNTS ATTRIBUTABLE TO ALCOA COMMON SHAREHOLDERS:
Income (loss) from continuing operations $ 61 $ 73 $ 4 $ (719) Income (loss) from discontinued operations – 4 (8) (155) Net income (loss) $ 61 $ 77 $ (4) $ (874) EARNINGS PER SHARE ATTRIBUTABLE TO ALCOA COMMON SHAREHOLDERS (M):
Basic: Income (loss) from continuing operations $ 0.06 $ 0.07 $ – $ (0.78) Income (loss) from discontinued operations – 0.01 (0.01) (0.17) Net income (loss) $ 0.06 $ 0.08 $ (0.01) $ (0.95) Diluted: Income (loss) from continuing operations $ 0.06 $ 0.07 $ – $ (0.78) Income (loss) from discontinued operations – 0.01 (0.01) (0.17) Net income (loss) $ 0.06 $ 0.08 $ (0.01) $ (0.95) Dividends paid per common share $ 0.03 $ 0.03 $ 0.09 $ 0.23
The accompanying notes are an integral part of the consolidated financial statements.
4
Alcoa and subsidiaries Consolidated Balance Sheet (unaudited) (in millions) ASSETS
September 30, 2010
December 31, 2009
Current assets: Cash and cash equivalents $ 843 $ 1,481 Receivables from customers, less allowances of
$57 in 2010 and $70 in 2009 1,971 1,529 Other receivables 323 653 Inventories (F) 2,435 2,328 Prepaid expenses and other current assets 947 1,031
Total current assets 6,519 7,022 Properties, plants, and equipment 36,802 35,525 Less: accumulated depreciation, depletion, and amortization 16,888 15,697
Properties, plants, and equipment, net 19,914 19,828 Goodwill 5,128 5,051 Investments 1,189 1,061 Deferred income taxes 3,070 2,958 Other noncurrent assets 2,449 2,419 Assets held for sale (C) 101 133
Total assets $ 38,370 $ 38,472 LIABILITIES Current liabilities:
Short-term borrowings $ 119 $ 176 Accounts payable, trade 1,971 1,954 Accrued compensation and retirement costs 904 925 Taxes, including income taxes 397 345 Other current liabilities 1,091 1,345 Long-term debt due within one year 200 669
Total current liabilities 4,682 5,414 Long-term debt, less amount due within one year 8,990 8,974 Accrued pension benefits (P) 2,677 3,163 Accrued postretirement benefits 2,686 2,696 Other noncurrent liabilities and deferred credits 2,526 2,605 Liabilities of operations held for sale (C) 31 60
Total liabilities 21,592 22,912 COMMITMENTS AND CONTINGENCIES (I) CONVERTIBLE SECURITIES OF SUBSIDIARY (G) – 40 EQUITY Alcoa shareholders’ equity:
Preferred stock 55 55 Common stock (L) 1,141 1,097 Additional capital (L) 7,094 6,608 Retained earnings 10,922 11,020 Treasury stock, at cost (4,171) (4,268) Accumulated other comprehensive loss (1,688) (2,092)
Total Alcoa shareholders' equity 13,353 12,420 Noncontrolling interests 3,425 3,100
Total equity 16,778 15,520 Total liabilities and equity $ 38,370 $ 38,472
The accompanying notes are an integral part of the consolidated financial statements.
5
Alcoa and subsidiaries Statement of Consolidated Cash Flows (unaudited) (in millions)
Nine months ended September 30,
2010 2009
CASH FROM OPERATIONS Net income (loss) $ 100 $ (822) Adjustments to reconcile net income (loss) to cash from operations: Depreciation, depletion, and amortization 1,080 942 Deferred income taxes 62 (55) Equity (income) loss, net of dividends (25) 4 Restructuring and other charges (D) 219 168 Net gain from investing activities – asset sales (J) (8) (104) Loss from discontinued operations (C) 8 155 Stock-based compensation 70 69 Excess tax benefits from stock-based payment arrangements (1) – Other 121 137 Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments:
(Increase) decrease in receivables (467) 463 (Increase) decrease in inventories (94) 1,053 Decrease in prepaid expenses and other current assets 34 94 Increase (decrease) in accounts payable, trade 16 (736) (Decrease) in accrued expenses (384) (430) Increase (decrease) in taxes, including income taxes 167 (515) Pension contributions (70) (102) (Increase) in noncurrent assets (56) (223) Increase in noncurrent liabilities 136 141 (Increase) decrease in net assets held for sale (C) (24) 11
CASH PROVIDED FROM CONTINUING OPERATIONS 884 250 CASH PROVIDED FROM (USED FOR) DISCONTINUED OPERATIONS 7 (9) CASH PROVIDED FROM OPERATIONS 891 241 FINANCING ACTIVITIES Net change in short-term borrowings (57) (125) Net change in commercial paper – (1,535) Additions to long-term debt (H) 1,082 1,043 Debt issuance costs (5) (17) Payments on long-term debt (H) (1,587) (31) Proceeds from exercise of employee stock options 8 – Excess tax benefits from stock-based payment arrangements 1 – Issuance of common stock – 876 Dividends paid to shareholders (94) (198) Distributions to noncontrolling interests (154) (93) Contributions from noncontrolling interests 121 327 Acquisitions of noncontrolling interests (G) (66) – CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (751) 247 INVESTING ACTIVITIES Capital expenditures (650) (1,254) Capital expenditures of discontinued operations – (5) Acquisitions, net of cash acquired (E) (72) 112 Proceeds from the sale of assets and businesses (E) (6) (73) Additions to investments (224) (26) Sales of investments 138 1,026 Net change in short-term investments and restricted cash 7 8 Other 9 (9) CASH USED FOR INVESTING ACTIVITIES (798) (221) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 20 37 Net change in cash and cash equivalents (638) 304 Cash and cash equivalents at beginning of year 1,481 762 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 843 $ 1,066
The accompanying notes are an integral part of the consolidated financial statements.
6448403224201612
86
Percentsharestraded
24168
Target Price Range2013 2014 2015
ALCOA NYSE-AA 16.52 29.5 NMF22.0 1.78 0.7%
TIMELINESS 3 Raised 7/23/10
SAFETY 3 Lowered 2/2/96
TECHNICAL 2 Lowered 1/14/11BETA 1.45 (1.00 = Market)
2013-15 PROJECTIONSAnn’l Total
Price Gain ReturnHigh 30 (+80%) 16%Low 20 (+20%) 5%Insider Decisions
F M A M J J A S Oto Buy 0 0 0 0 0 0 0 0 1Options 1 0 0 0 2 0 0 0 0to Sell 1 0 1 0 0 0 0 0 0Institutional Decisions
1Q2010 2Q2010 3Q2010to Buy 272 223 210to Sell 280 301 268Hld’s(000) 647499 587696 611097
High: 41.7 43.6 45.7 39.8 38.9 39.4 32.3 37.0 48.8 44.8 16.5 17.6Low: 18.0 23.1 27.4 17.6 18.5 28.5 22.3 26.4 28.1 6.8 5.0 9.8
% TOT. RETURN 12/10THIS VL ARITH.
STOCK INDEX1 yr. -3.6 26.83 yr. -54.9 27.65 yr. -42.1 49.5
CAPITAL STRUCTURE as of 9/30/10Total Debt $9309 mill. Due in 5 Yrs $4730 mill.LT Debt $8990 mill. LT Interest $450 mill.(Long-term interest earned: 2.0x)(Total interest coverage: 2.0x) (40% of Cap’l)
Uncapitalized Annual rentals $224.0 mill.Pension Assets 12/09 $8.5 bill. Oblig. $11.6 bill.Pfd Stock $55.0 mill. Pfd Div’d $2.0 mill.
Common Stock 1,021,441,559 shs.as of 10/15/10MARKET CAP: $16.9 billion (Large Cap)CURRENT POSITION 2008 2009 9/30/10
($MILL.)Cash Assets 762 1481 843Receivables 1883 1529 1971Inventory (LIFO) 3238 2328 2435Other 2267 1684 1270Current Assets 8150 7022 6519Accts Payable 2518 1954 1971Debt Due 2069 845 319Other 2692 2615 2392Current Liab. 7279 5414 4682
ANNUAL RATES Past Past Est’d ’07-’09of change (per sh) 10 Yrs. 5 Yrs. to ’13-’15Sales 3.5% 3.5% NMF‘‘Cash Flow’’ -.5% -2.5% 7.5%Earnings -5.0% -10.0% 14.0%Dividends 4.5% -2.0% NMFBook Value 7.0% 2.5% Nil
Cal- Fullendar Year
QUARTERLY SALES ($ mill.)Mar.31 Jun.30 Sep.30 Dec.31
2007 7908 8066 7387 7387 307482008 6998 7245 6970 5688 269012009 4147 4244 4615 5433 184392010 4887 5187 5287 5604 209652011 5450 5700 6100 6450 23700Cal- Full
endar YearEARNINGS PER SHARE A
. Mar.31 Jun.30 Sep.30 Dec.312007 .76 .81 .63 .75 2.952008 .36 .67 .37 d1.16 .282009 d.59 d.32 .07 d.27 d1.062010 d.19 .13 .06 .15 .152011 .15 .20 .15 .20 .70Cal- Full
endar YearQUARTERLY DIVIDENDS PAID B ■
Mar.31 Jun.30 Sep.30 Dec.312007 .17 .17 .17 .17 .682008 .17 .17 .17 .17 .682009 .17 .03 .03 .03 .262010 .03 .03 .03 .03 .122011
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200713.86 17.72 18.93 19.79 20.91 22.19 26.50 26.97 23.99 24.76 26.96 30.06 34.94 37.161.21 2.13 1.88 2.25 2.33 2.66 3.13 2.97 2.25 2.56 2.92 2.90 4.39 4.63.27 1.11 .79 1.09 1.21 1.41 1.81 1.46 .92 1.21 1.53 1.43 2.90 2.95.20 .23 .33 .25 .38 .40 .50 .60 .60 .60 .60 .60 .60 .68.86 1.26 1.44 1.36 1.27 1.25 1.30 1.39 1.50 .99 1.31 2.44 3.68 4.39
5.52 6.22 6.39 6.48 8.18 8.51 13.13 12.46 11.69 13.84 15.21 15.30 16.76 19.29714.85 705.26 690.04 673.10 733.62 735.50 865.52 847.59 844.82 868.49 870.98 870.27 869.54 827.40
36.3 11.0 18.9 17.1 14.8 20.4 17.6 25.3 32.3 21.6 21.5 19.5 10.4 12.42.38 .74 1.18 .99 .77 1.16 1.14 1.30 1.76 1.23 1.14 1.04 .56 .66
2.1% 1.8% 2.2% 1.3% 2.1% 1.4% 1.6% 1.6% 2.0% 2.3% 1.8% 2.1% 2.0% 1.9%
22936 22859 20263 21504 23478 26159 30379 3074818.8% 15.4% 13.1% 13.4% 14.4% 14.0% 17.9% 15.5%1219.0 1253.0 1116.0 1194.0 1204.0 1267.0 1280.0 1268.01489.0 1263.0 785.0 1034.0 1340.6 1259.3 2540.0 2564.033.5% 33.3% 33.8% 24.2% 25.5% 34.6% 25.1% 37.8%6.5% 5.5% 3.9% 4.8% 5.7% 4.8% 8.4% 8.3%
d376.0 1789.0 1852.0 1656.0 1195.0 1422.0 1876.0 920.04987.0 6388.0 8365.0 6692.0 5346.0 5279.0 4778.0 6371.011422 10614 9927.0 12075 13300 13373 14631 1601610.3% 8.5% 5.2% 6.3% 7.8% 7.6% 14.0% 12.3%13.0% 11.9% 7.9% 8.6% 10.1% 9.4% 17.4% 16.0%9.4% 7.1% 2.8% 4.3% 6.2% 5.5% 13.8% 12.4%28% 41% 65% 50% 39% 42% 21% 23%
2008 2009 2010 2011 © VALUE LINE PUB. LLC 13-1533.61 18.92 20.45 23.00 Sales per sh 26.951.83 .33 1.55 2.25 ‘‘Cash Flow’’ per sh 3.45.28 d1.06 .15 .70 Earnings per sh A 1.60.68 .26 .12 .12 Div’ds Decl’d per sh B■ .25
4.30 1.66 1.20 1.80 Cap’l Spending per sh 3.0014.59 12.69 13.15 13.85 Book Value per sh C 15.70
800.32 974.38 1025.00 1030.00 Common Shs Outst’g D 1050.00NMF NMF NMF Avg Ann’l P/E Ratio 15.5NMF NMF NMF Relative P/E Ratio 1.052.4% 2.4% .9% Avg Ann’l Div’d Yield 1.0%
26901 18439 20965 23700 Sales ($mill) 2830012.3% 1.9% 11.0% 13.5% Operating Margin 16.5%1234.0 1311.0 1450 1580 Depreciation ($mill) 1930229.0 d985.0 155 720 Net Profit ($mill) 1680
43.2% NMF 45.0% 45.0% Income Tax Rate 45.0%.9% NMF .7% 3.0% Net Profit Margin 6.0%
871.0 1608.0 1800 1700 Working Cap’l ($mill) 13008509.0 8974.0 9000 9000 Long-Term Debt ($mill) 800011735 12420 13500 14250 Shr. Equity ($mill) 165002.1% NMF 2.0% 4.5% Return on Total Cap’l 8.0%2.0% NMF 1.0% 5.0% Return on Shr. Equity 10.0%NMF NMF .2% 4.0% Retained to Com Eq 8.5%NMF NMF 79% 17% All Div’ds to Net Prof 16%
Company’s Financial Strength B+Stock’s Price Stability 40Price Growth Persistence 5Earnings Predictability 15
(A) Primary shares through ’96, diluted after.Excludes nonrecurring items: ’94, 52¢; ’96,(12¢); ’97, 13¢; ’01, (41¢); ’02, 43¢; ’03, (7¢);’04, (4¢); ’05, (3¢); ’06, (33¢). Excludes discon-
tinued operations: ’07, (28¢); ’08, (37¢); ’09,(17¢); ’10, (1¢). Quarters may not sum due tochange in shares out. Next earnings report dueearly April. (B) Dividends historically paid in
late Feb., May, Aug., Nov. ■ Dividend reinvest-ment plan available. (C) Includes intangibles:At 12/31/09 $5,641 mill., $5.79/sh.(D) In millions, adjusted for stock splits.
BUSINESS: Alcoa is a global leader in aluminum production, serv-ing the aerospace, automotive, building and construction, commer-cial transportation and industrial markets. Sold the consumer andpackaging division during 1Q 2008. Has more than 300 operatingand sales locations in over 35 countries. 2009 sales by segment:Primary Metals, 33%; Flat-Rolled Products, 28%; Engineered Prod-
ucts and Solutions, 22%; Alumina, 17%. Foreign sales : 48% of to-tal. Has about 59,000 employees. Blackrock, Inc. owns 8.8% ofcommon stock, Capital World Investors, 5.5%, officers and direc-tors own less than 2.0% (3/10 Proxy). Chairman and CEO: KlausKleinfeld. Incorporated: PA. Address: 201 Isabella St., Pittsburgh,PA. 15212. Telephone: 412-553-4545. Internet: www.alcoa.com.
We expected Alcoa to return to profit-ability in 2010. Demand for the compa-ny’s products improved across certain endmarkets (such as aerospace and trans-portation). Restructuring efforts alsohelped. Consequently, earnings per sharemay have been around $0.15 last year.That estimate does not look very im-pressive, but it would be a majorturnaround from the per-share deficit of$1.06 in 2009.The momentum may continue thisyear. The global economy appears to be onthe slow road to recovery, which shouldhelp support aluminum prices. Ongoingstreamlining initiatives ought to aid thecompany, as well. But results could be con-strained a bit by high energy costs and oc-casional unfavorable currency movements.Despite that, the bottom line stands toclimb to $0.70 a share in 2011.We are upbeat about the company’soperating performance out to mid-decade. China, Brazil, India, and otherdeveloping countries are experiencing anexpansion of the middle class. As a result,demand for such things as housing andtransportation should rise at a decent clip
going forward. Alcoa stands to be helpednicely by this trend, given that aluminumis strong, lightweight, and has environ-mental benefits. Moreover, business com-binations ought to aid the company’s ex-pansion, though future purchases are ex-cluded from our figures. Finally, profitsshould be bolstered by further improve-ments in operating efficiencies.The stock has regained some luster oflate (even though it continues to trade atrelatively low levels). We think the move-ment can be traced, in part, to Alcoa’sdecent earnings prospects for the newyear. Another factor that has helped theseshares has been the equity markets’ betterperformance.Even at the current quotation, upsidepotential is worthwhile. But given thestock’s susceptibility to changes inaluminum prices, only risk-tolerant inves-tors should take a look.Growth in the dividend ought toresume eventually. Still, it could takesome time before the payout returns to thehighwater mark of $0.68 a share in 2007and 2008.Frederick L. Harris, III January 14, 2011
LEGENDS7.5 x ″Cash Flow″ p sh. . . . Relative Price Strength
2-for-1 split 2/992-for-1 split 6/00Options: YesShaded areas indicate recessions
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