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Alcoa – AA (NYSE) 80% upsideYash Samat, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director
Alcoa – AA (NYSE) 80% upsideYash Samant, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director
AlcoaThesis
Alcoa is splitting its value chain into two distinct sections. This will allow management
to focus on higher-margin projects
Alcoa sells products not easily commoditized
Long-term contracts are not recognized by a commodity-panicked market
Industry Overview
Jan-10Mar-
10May-
10Jul
-10Oct-
10Dec-
10Feb
-11May-
11Jul
-11Se
p-11
Dec-11Feb
-12Ap
r-12Jun
-12Se
p-12
Nov-12Jan
-13Ap
r-13Jun
-13Au
g-13
Nov-13Jan
-14Mar-
14May-
14Au
g-14Oct-
14Dec-
140
500
1000
1500
2000
2500
3000
Aluminum Price
Date
Alum
inum
Pric
e (U
SD/t)
Favorable Market ConditionsCommodity Price of Aluminum
Stable
Growth From Specialized Industries
Volatility Protection
Company Partnerships Well Positioned Aluminum Worldwide
China risk minimal
Strong demand in NA and Europe drive sales.
Use overcomes priceAluminum in the U.S.
YOY use of aluminum increases in U.S automobiles.
U.S vehicles must become lighter to meet new emissions standards
Company Overview
Existing Alcoa shareholders will receive stock in both
Delivering Shareholder Value
Value-Add Co. Upstream Co.Premier supplier of high-performance multi-material products and solutions
Positioned to grow in diversified set of growth markets
Robust margins and investment opportunities above cost of capital
Expanded multi-material, technology and process expertise
Robust demand growth of 6.5% in 2015 and 2x between 2010 and 2020
World’s largest, low cost bauxite miner at the 19th percentile on cost curve
Operational flexibility to profit from market cyclicality
Collaborate to produce next-gen automotive aluminum alloys with key
manufacturers
Positioned for growth from horizontal monopolistic structure
Competitive Advantage
Turn Into Aluminum Based Products
Sell to Manufactures
Company 1:Upstream
Company 2: Value-Added
Distribution of Revenue Now
51%27%
15%
7%% Sales - Location
United StatesEuropePacificOther Amer-icas
29%
26%
23%
14%8%
% Sales - Segment
Global Rolled Products
Primarty Metals
Engineered Products and Solutions
Alumina
Other
Valued-Added Co. Strong Top +Bottom Line Growth Insulated from Market
Dow Jones U.S. Aluminum Index
Isolated from highly volatile market conditions--long term manufacturing contracts and control over cost of raw materials.
Company Overview: Value-Add Co: Key Businesses
Highly Diversified
Value-Added Co: Increase in Demand for Parts from Key Industries
Company Overview: Upstream Co: Continued Drive for ProfitabilityStrong Growth Despite Falling Commodities Prices
Strengths: Impeding division of the company Diversified set of customers for aluminum products Insulated from volatile commodity prices Horizontal integration of mining and production operations
Weakness: Division execution risk
Threats: Rising energy prices(i.e. natural gas) Global market weakens
Opportunities Automotive Lightening Micro mill alloy produced in conjunction with Ford Increase in demand for aluminum parts from aerospace manufacturers
SWOT Analysis Indicated Opportunities in Emerging Industries
Company Overview
In the NewsCatalysts – 3yr time horizon
Alcoa signed a $1 billion contract with Airbus
Alcoa’s quarterly earnings release on Thursday
10/3/
2005
2/20/2
006
7/10/2
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11/27
/2006
4/16/2
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9/3/20
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1/21/2
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6/9/20
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10/27
/2008
3/16/2
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8/3/20
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12/21
/2009
5/10/2
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9/27/2
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2/14/2
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7/4/20
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11/21
/2011
4/9/20
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8/27/2
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1/14/2
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6/3/20
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/2013
3/10/2
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7/28/2
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12/15
/2014
5/4/20
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9/21/2
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05
10152025303540
Price
Valuation
Comps
Company Comps
Ticker Name P/E Total Debt (in mm) Total Equity (in mm) Debt/Equity P/BV NTMTEV/EBITDA NTM 2015 Total Revenue (in mm)
NYSE:AA Alcoa Inc.16.4 8,846.0 14,794.0 0.60 1.80 6.3 24,332.0
NasdaqGS:KALU Kaiser Aluminum Corporation16.3 225.2 758.8 0.30 2.00 9.5 1,415.8
NasdaqGS:CENX Century Aluminum Co.4.4 254.7 1,091.2 0.23 0.40 1.8 2,163.3
NYSE:CSTM Constellium 13.49 1,205.0 (41.4) -29.11 NM 9.1 5,193.7
Nucor16.0 4,360.6 8,075.0 0.54 2.70 7.9 21,105.1
Average 13.3 0.42 1.725 6.9
DCF 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019E
Sales $ 21,013 $ 24,951 $ 23,700 $ 23,032 $ 23,906 $ 24,332 $ 23,062 $ 24,135 $ 25,100 $ 26,819 $ 27,423
% change 19% -5% -3% 4% 4% 5% 4% 2% 2%
Cost of Goods Sold $ (17,116) $ (20,474) $ (20,401) $ (19,277) $ (19,070) $ (18,946) $ (17,988) $ (18,825) $ (19,578) $ (20,918) $ (21,390)
Gross Profit $ 3,897 $ 4,477 $ 3,299 $ 3,755 $ 4,836 $ 5,386 $ 5,074 $ 5,310 $ 5,522 $ 5,900 $ 6,033
Sales, general, and administrative $ (961) $ (1,027) $ (997) $ (1,008) $ (953) $ (928) $ (922) $ (965) $ (1,004) $ (1,073) $ (1,097)
Other operating charges $ (174) $ (184) $ (197) $ (192) $ (218) $ (240) $ (231) $ (241) $ (251) $ (268) $ (274)
EBITDA $ 2,762 $ 3,266 $ 2,105 $ 2,555 $ 3,665 $ 4,218 $ 3,921 $ 4,103 $ 4,267 $ 4,559 $ 4,662
Depreciation and Amortization $ (1,450) $ (1,479) $ (1,460) $ (1,421) $ (1,371) $ (1,322) $ (1,384) $ (1,448) $ (1,506) $ (1,609) $ (1,645)
EBIT $ 1,312 $ 1,787 $ 645 $ 1,134 $ 2,294 $ 2,896 $ 2,537 $ 2,655 $ 2,761 $ 2,950 $ 3,017
Taxes $ (148) $ (255) $ (162) $ (428) $ (320) $ (620) $ (761) $ (796) $ (828) $ (885) $ (905)
NOPAT $ 1,164 $ 1,532 $ 483 $ 706 $ 1,974 $ 2,276 $ 1,776 $ 1,858 $ 1,933 $ 2,065 $ 2,112
Depreciation and Amortization $ 1,450 $ 1,479 $ 1,460 $ 1,421 $ 1,371 $ 1,322 $ 1,384 $ 1,448 $ 1,506 $ 1,609 $ 1,645
Change in Net Working Capital $ 528 $ (63) $ 77 $ 276 $ (795) $ (592) $ (165) $ 10 $ (208) $ (45) $ 78
CAPEX $ (1,015) $ (1,287) $ (1,261) $ (1,193) $ (1,219) $ (1,266) $ (1,153) $ (1,207) $ (1,255) $ (1,341) $ (1,371)
Unlevered Free Cash Flow $ 2,127 $ 1,661 $ 759 $ 1,210 $ 1,331 $ 1,740 $ 1,841 $ 2,110 $ 1,976 $ 2,288 $ 2,464
AV:
COGS/Sales -81.5% -82.1% -86.1% -83.7% -79.8% -77.9% -83% 78% 78% 78% 78% 78%
SG&A/Sales -4.6% -4.1% -4.2% -4.4% -4.0% -3.8% -4.3% 4% 4% 4% 4% 4%
Other/Sales -0.8% -0.7% -0.8% -0.8% -0.9% -1.0% -0.8% 1% 1% 1% 1% 1%
D/A Sales -7% -6% -6% -6% -6% -5% -6.2% 6% 6% 6% 6% 6%
Tax Rate -11% -14% -25% -38% -14% -21% -20.5% 21% 21% 21% 21% 21%
CAPEX/Sales -5% -5% -5% -5% -5% -5% -5.1% 5% 5% 5% 5% 5%
DCF and Implied Discount
Beta: 1.11Equity Risk Premium: 6%Risk Free Rate: 2%Cost of Equity: 6.44%Cost of Debt: 4%Cost of Preferred Equity: 5%Dividend: $ 3.75 Preferred Share Price: $ 81.02 Market Value of Debt: $ 8,789.00 Market Value of Equity: $ 12,256.00 Market Value of Preferred Equity: $ 58.00 WACC: 5.42%
WACC: 5.4% Growth Rate: 2% 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019EUnlevered Free Cash Flow: $ 2,127.00 $ 1,661.00 $ 759.00 $ 1,210.00 $ 1,331.00 $ 1,740.00 $ 1,841.39 $ 2,109.73 $ 1,975.72 $ 2,288.21 $ 2,463.80 PV of FCF: $ 9,076.78
Multiple 6.31 PV of Terminal Value (Multiple): $ 22,594.50 % of Enterprise Value: 0.76805928 Enterprise Value $ 31,671.28 Enterprise Value $ 31,671.28 Implied Equity Value: $ 21,811.28 Implied Share Price: $ 18.79
Implied Discount: 80%
Risks and Mitigants
Not Just a Mining CompanyRisks and Mitigants
Demand RiskEmission Standards
Aluminum Prices
Energy RequirementsEnergy Prices
Decreased Reliance
Split Execution RiskMulti-year Process
No loss of coverage
Conclusion
Appendix
Why DCF for mining company? Why not Net Asset Value? Alcoa has so much aluminum in house that it doesn’t even bother
figuring out how much it has in reserves. Most of the company literature is based in EBITDA and their operating performance metrics are on a cash-flow basis
Your Implied Discount is Pretty High....why? The company has been adversely hit by a commodity bust that doesn’t
really affect it’s ability to price Can you tell me more about this split?
The details have yet to be released....the process has yet to be cleared by the Feds, but the project has been years in the making and management has assured equity holders they will get equal rights in both companies
Your comparables don’t seem like they reflect Alcoa Not many companies own their entire value chain....we considered doing
a sum-of-parts analysis, but figured it wouldn’t be appropriate if we didn’t have synergy information from the company yet
We Know You Have Questions...