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Research Analysts
Jace Hepker [email protected]
Tommy Murray [email protected]
Jack Warning [email protected] Company Overview Alcoa Inc. (AA) is one of the world’s largest producers of aluminum and manufacturers a variety of lightweight metal products which consists of aluminum, nickel, and titanium. The company operates across 5 business units which include Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction. Alcoa’s innovative products are used across many different industries including aerospace, automobiles, packaging, commercial transportation, oil and gas, building and construction, consumer electronics, and industrial applications. They were founded in Pittsburgh, Pennsylvania in 1888, and they are currently headquartered in New York, New York. They operate internationally in 30 countries, with the majority of their operations in the United States and Europe. Stock Performance Highlights 52 Week Range: $6.14 - $14.29 Beta Value: 1.22 YTD Return: 2.23% 5yr Return: -40.65% Share Highlights Market Capitalization: $13.27BN Shares Outstanding: 1.31BN Book Value/Share: EPS (ttm): -$0.31 Dividend Yield: 1.20% Company Performance Highlights Sales FY15: $22,534BN ROE FY15: -3.6% ROA FY15: -0.9% Financial Ratios Current Ratio: 1.53 Quick Ratio: 0.63 Long-Term Debt/Equity: 64
• Initiating a HOLD recommendation with a target price between $10-$13
• With strong sales growth coming from Alcoa’s Value Add business, we believe they will continue to expand into the aerospace and automobile industries locking in multibillion dollar contracts in the upcoming year
• Alcoa’s share price has been suppressed due to uncertainty in the global economy and specially in commodities
• Recent acquisitions of RTI International Metals, Firth Rixson, and TITAL by Alcoa has given them the ability to better tailor their services to their clients
Current Price $9.99 Target Price $10-$13
Current Price $10.01 Target Price $10-$13
Better Days Ahead
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Gross Domestic Product Gross Domestic Product, the monetary sum of all finished goods and services, is a gauge to get a better understanding of how the economy is growing, both domestically and internationally. For the FY ended 2014 and 2015, the U.S. Real GDP rose 2.4% year-over year. The growth in 2015 was most notably due to declarations in nonresidential fixed investment, residential fixed investment, exports, and state and local government spending. Imports did increase as we would expect with the dollar trading higher which weighed on Real GDP for 2015.1 One economy that everyone is closely watching is China, due to their economic slowdown as they are progressively moving from an industrialized country to more service oriented one. For the first quarter of 2016, the Chinese economy only expanded 1.1% vs. the 1.5% consensus. This news comes after China posted the slowest growth since 2009, coming in at 6.7% for 2015.2
With the global economic slowdown, and a strong U.S. Dollar, we are expecting U.S. GDP to grow between 2.7-3.1% over the next two years. With slowed global growth, we expect U.S. growth to continue to raise at a slow pace, watching net exports and government spending as indicators. Exchange Rates
Exchange rates play a pivotal role in the global economy. Alcoa Inc. has operations internationally, and the commodity prices for aluminum and alumina fluctuate daily due to exchange rates. Even small changes in the exchange rate can cost Alcoa substantial amounts of money. With a strong dollar, Alcoa, along with other major manufacturers in the United States have been negatively impacted by a strong USD.
Source: St. Louis FED
Considering we are expecting commodity prices to remain low, we are also predicting that the USD will remain relatively strong compared to a basket of currencies over the next two years. Commodity Prices It is no secret that we have been experiencing suppressed commodity prices recently with slowed demand from China, the world’s biggest consumer. Slower growth, coupled with high production has led to a high supply of aluminum internationally, and we predict that this economic atmosphere is here to stay for the short term. Interest Rates Interest rates are an essential part to the economy. They play an important role for both the borrower and borrower. We have managed to stay in a low interest rate environment for 5+ years as we are still fully recovering from the crisis of 2008. This has both a positive and negative side to it. For multinational companies looking for cheap financing for their businesses, they can borrow near historical lows. Additionally, one would think borrowing would induce capital expenditure, thus helping the economy. On the other side, staying in this low rate environment for too long could be detrimental. Investors not only domestically but internationally are looking for yield on their investments. This can pose a problem for elders trying to retire and live of fixed income payments.
Industry Description Companies that operate within the Aluminum Sub-Industry process and manufacture alumina, aluminum and aluminum products. Most demand comes from large manufactures of durable goods such as vehicles, airlines, transportation and others. Porters Five Forces Competition: Alcoa Inc. operates within the Aluminum Industry which we compare to their competition across a variety of metrics. As you can see from the table below, market capitalization within the industry varies drastically, with
Macroeconomic Outlook
Industry Analysis
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Alcoa having the highest market capitalization at $10.64 billion which is over $4 billion higher than their closest competitor as seen below.
The aluminum industry over the past 5 years has performed poorly for investors, however, Alcoa has done better than its competitors, excluding Kaiser Aluminum Corp. over that period. Their current forward P/E ratio of 14.3 is right in line with their competitors. As a measure of how they are performing relative to their assets, Alcoa has a lower ROA than most of its peers, however, this can be attributed to the high fixed closing and curtailment costs that the company has been experiencing in luau of the suppressed commodities prices. Where Alcoa Inc. is starting to gain a significant competitive advantage to its peers is in the expansion into the automotive and aerospace industries. In 2015, the company announced the acquisition of RTI International Metals Inc., a global leader in titanium and specialty metal products and services for the aerospace, defense, energy and medical device markets2. Additionally, they acquired TITAL which is also a manufacturer of titanium and aluminum castings for aircraft engines and other aircraft parts. These acquisitions, coupled with the opening of a new state-of-the-art facility in La Porte, Indiana, and the expansion of their Alcoa, Tennessee facility give them a major advantage in securing large contracts into the future. Entrance into the Industry Because the aluminum sub-industry has been around for decades, large companies have dominated market share, thus making it difficult to enter the industry. There are also high fixed costs to entrance, such as acquiring land to mine alumina, and building a factory to manufacture aluminum. Additionally, producing aluminum is energy intensive, again requiring significant capital up front. With few major competitors in this industry, it creates intense competition between the firms that are fighting
for market share. This can pose a problem with companies trying to offer the lowest prices. Power of Suppliers Producers face significant challenges with lower demand for aluminum, and lower prices, thus hurting not only revenues, but margins as well. Companies with large scale operations will be better off in these conditions due to cheaper production costs. Alcoa has benefited from operating on a large scale as well as acquiring companies in the aerospace manufacturing industry to gain a competitive advantage and cut costs
Power of Buyers
The biggest competitive force that shapes the aluminum industry is price and quality. Because commodities are generally considered undifferentiated, buyers will look for the company that offers the lowers prices and best quality product. There is also the risk of buyers choosing substitutes for aluminum such as plastic or steel.
From what we have discussed, we predict the global economy may experience some headwinds for the next two years due to slowed demand from China and throughout the world. We believe that there will be slowed economic growth throughout the world, and we estimate between 2.7-3.1% over the next two years. With China cutting interest rates, we feel that the effects will be realized in three years when their QE program finally sets in. Although they say that it is nothing like what the U.S. or the ECB has done, they have cut rates six times since November 2014 to try and rejuvenate growth within the country. We believe within our forecasting horizon of 2022, we will see international economic growth from “free money” and China’s plan to build Beijing into a mega city, with more people than Japan.
Alcoa Inc. was founded in Pittsburgh, Pennsylvania in 1888, and is currently headquartered in New York, New York. They operate internationally in 30 countries, with most of their operations in the United States and Europe. Alcoa Inc. is one of the world’s largest manufacturers of lightweight metal products which consists of aluminum, nickel, and titanium. Alcoa’s products are used across a
Market Cap P/E D/E** ROA 5 Year ReturnCompany:Alcoa Inc. $10,640 M 14.3 2.04 3.33% -55.84%Norsk Hydro ASA $6,600 M 48.7 0.71 4.85% -60.07%Aluminum Corp. of China ADR $4,370 M N/A 5.81 -0.49% -68.10%Kaiser Aluminum Corporation $1,380 M 13.1 0.72 5.55% 40.14%Constellium N.V.* $425.1 M N/A -71.1 1.96% -69.26%Century Aluminum Co. $406.8 M 10.4 0.85 3.64% -74.94%*Has data for returns only from 5/26/2013 to present
**Data for year end 12/31/2014 for consistantcy
Sources: Yahoo Finance, Bloomberg, S&P NetAdvantage
Capital Markets Outlook
Company Analysis
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wide variety of industries including aerospace, automobiles, packaging, commercial transportation, oil and gas, building and construction, consumer electronics, and industrial applications.3
In Q3 of 2015, Alcoa Inc. divided into five segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction. Alcoa’s sales, excluding intersegment sales, for each respective segment as of fiscal year 2015 are shown below.
As of September 28th, 2015, Alcoa Inc. announced that it will be splitting the company into the Upstream Business (Alumina and Primary Metals) will remain Alcoa Inc. Management has been curtailing the Upstream Business by reducing production and closing facilities that are not as profitable, most recently the Warrick Operations smelter in Evansville, Indiana. The Value-Add business (Globally Rolled Products, Engineered Products and Solutions, and Transportation and Construction) will split off and become Arconic.(ALCOA) The complete split of the company is expected to be completed in the second half of 2016, however, we will continue to analyze the company as one.(ALCOA) The aluminum industry is highly cyclical, and Alcoa is subject to cyclical fluctuations in global economic conditions and aluminum end-use markets1. Alcoa sells many products to industries that are highly cyclical, which can cause volatility in the demand for the finished goods manufactured by its clients. These industries can be affected by the U.S. and overall economy, exchange rates, energy prices, as well as many other factors. Aluminum demand is driven by overall economic growth.11
As of April 18th, 2016, Alcoa’s stock price is $10.01, which is in the middle of their 52 week range of $6.14 - $14.29, giving them a market capitalization of $13.27 billion. Their YTD performance has rebounded to 2.23%. In 2015, Alcoa’s sales were $22.51 billion, a decrease of from sales in 2014 of $23.906 billion. They saw a decrease in net income from $268 million in 2014 to $(121) million in 2015, mostly due to one-time items regarding closing facilities and curtailment of production in their Primary Metals and Alumina segments.11
With the announcement of Alcoa splitting into two separate companies in 2016, we expect to see the upstream operations (Alumina and Primary Metals) percentage of sales currently at 40.2% to decrease relative to their downstream operations (Globally Rolled Products, Engineered Products and Solutions, and Transportation and Construction) percentage of sales at 59.8%.
Business Segments: Alcoa has operations in every segment of the of the aluminum industry, making it a fully integrated producer of aluminum, and giving it a competitive advantage over its peers. It mines bauxite, refines it into alumina, makes
Country 2015 2014 % of Total Sales 2015United States 12425 12103 55.14%Spain 2853 3359 12.66%Australia 2196 3028 9.75%Brazil 854 1398 3.79%France 802 915 3.56%United Kingdom 698 464 3.10%Hungary 622 630 2.76%China 565 415 2.51%Russia 455 642 2.02%Canada 308 143 1.37%Germany 264 229 1.17%Italy 139 150 0.62%Netherlands 34 36 0.15%Norway 30 31 0.13%Other 289 363 1.28%Total Sales 22534 23906 100.00%Source: Alcoa.com
Sales by Country (in Millions
Product Category 2015 2014 % of Total Sales 2015Alumina 3333 3401 15%Primary Aluminum 5085 6011 23%Flat-Rolled Aluminum 6238 7351 28%Investment Castings 1812 1784 8%Fastening Systems 2168 1647 10%Architectural Aluminum Systems 951 1002 4%Aluminum Wheels 790 786 4%Other Extruded and Forged Products 1332 1019 6%Other 825 905 4%Total Sales 22534 23906 100%Source: Alcoa.com
Sales by Product Type (in Millions)
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primary aluminum and also produces midstream products like flat rolled sheets and downstream-engineered products4. With the current structure, Alcoa is separated into 5 divisions: Alumina, Primary Metals, Globally Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. Each division has its own set of customers and factors that significantly influence the profitability. Alumina: Alcoa’s Alumina segment involves the mining and extraction of alumina from the mineral Bauxite. They operates mines in Australia, Brazil, Jamaica, Suriname, Iceland, Norway, Spain, and the United States. They own almost all of their mines and facilities outright, which some equity interests’ internationally5. Alumina is aluminum at its most basic form, and is used for the rest of Alcoa’s upstream, midstream, and downstream operations. While around 30% of the Alumina is used internally by the Primary Metals division, a majority of it is sold to third party customers, who either process it for industrial chemicals or smelt it into primary aluminum. A portion of sales is also completed through alumina agents and distributors6. The mining and extraction of Alumina is a very energy intensive process. As a result, energy accounts for approximately 21% of Alcoa’s total alumina refining costs6. The rest of the costs is associated with the Bauxite and caustic soda, which is needed to extract the Alumina. Primary Metals: The alumina sold internally is used in Alcoa’s worldwide smelter system to produce primary aluminum. Three raw materials are needed for this process: aluminum, carbon, and energy. With the alumina being bought internally, the only other major cost is energy. Like the Alumina division, the energy required to transform alumina to aluminum is very intensive, accounting for 26% of aluminum production costs. To help reduce energy costs, Alcoa generates 25% of the energy required through its own power plants, thus reducing per unit cost of power.7. Due to the low commodity prices, this 25% supply over power does not cut costs to make up the difference of suppressed commodities. The aluminum is either sold to external customers and traders, or used internally by the Globally Rolled Products and Engineered Products and Solutions divisions. The sale of primary aluminum represents approximately 90% of this segment's third-party sales.7 Globally Rolled Products: Once the alumina is transformed to primary aluminum, it can then be used in Alcoa’s midstream Globally Rolled
Products division. The Globally Rolled Products division takes the primary aluminum and molds it into aluminum plate, sheet, and foil. The aluminum plate and sheet are primarily sold to companies in the aerospace, transportation/automobile, and building and construction industries. Major car manufacturers such as Ford, Toyota, Audi, General Motors, and Chrysler have all started making the transition from steel to aluminum due to its light weight properties.8 With low gas prices, we have seen consumers driving more, and buying new cars. Considering our dovish outlook for oil, we believe that the growth of this industry will range between 3-5% over the next 3 years. Aerospace companies, such as Boeing use Alcoa’s aluminum plates and sheets for their aircraft. In September of 2014, Alcoa and Boeing signed a long term contract worth over $1 billion dollars for aluminum plates to be used in Boeings airplane wings. This division also contains rigid aluminum sheets, which are sold to beverage, food cans, and packaging companies. Engineered Products and Solutions: In July of 2015, Alcoa decided to split its growing downstream Engineered Products and Solution into two divisions: one focusing on aerospace and the other on transportation and construction. This move comes after Alcoa’s acquisition of RTI International Metals Incorporated, Firth Rixson, and TITAL for a total of over $4.35BN. With these acquisitions, Alcoa is able to further expand its business in the aerospace industry. This division is now focused on the aerospace industry, where they build customized fastening systems and rings, parts for jet engines, super alloy airfoil, titanium and aluminum structural investment casings, and aluminum forgings for aerospace companies such as Boeing and Airbus. In December of 2015, Alcoa signed 2 multiyear contracts worth over $2.5 Billion with Boeing for aerospace fasteners and titanium seat track assemblies. Transportation and Construction Solutions Alcoa’s newest division, Transportation and Construction solutions, began in the 3rd quarter of 2015 and is aimed at expansion into emerging regional markets.6 In this division, Alcoa focuses on manufacturing next generation wheels, window bases, wall panels, flat sheets and coil, and other various products that are customized for the customer’s needs. One of Alcoa’s goals in this division is to build the next generation wheel. For example, a new higher, strength alloy (Magna Force) was developed for next generation wheels, as was the development and deployment of a more corrosion resistant, more
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environmentally friendly Dura-Bright EVO surface treatment.3 Earnings Analysis and Guidance: Q1 2016 Results: Sales for Q1 2016 were $4.95BN, missing estimates of $5.14BN. EPS in Q1 were $0.00 which also missed analysts’ estimates of $0.02. Excluding one-time items, Aerospace growth contributed to a 14% increase in revenue year over year, as Alcoa continues to grow in this industry securing their most recent contract of $1BN to supply industrial gas turbines. Coupled by 38% growth in the automotive sheet shipment year over year, Alcoa looks for these to be two industries to have a growing impact on the company’s profitability moving forward.9 Fiscal Year 2015 Results: Alcoa’s reported revenues for the fiscal year 2015 were $22.5 billion, down 6% from $23.906 billion in 2014. They realized a net loss during the year of $121 million or $.0.15 per share. A major financial target that stands out in 2015 is their productivity savings of $1.2 billion vs. the targeted $900 million. With their continued emphasis on cost cutting and curtailments in the struggling markets they operate within, monitoring this number will be important to the profitability of the company. Management Outlook: With continued focus on Alcoa’s downstream operations, they believe global sales growth in the aerospace industry and automotive industry will increase to 6-8% and 1-4% respectively. Our These estimates were made considering the demand and eight year order backlog for large commercial aircraft and jet engines coupled with strong North American automobile sales during this time of low borrowing costs, and continually suppressed oil prices. The opening and expansion of facilities in La Porte, Indiana and Alcoa, Tennessee, will continue help them lock in major contracts during the 2016 fiscal year and beyond due to the flexibility in their production process.9 In regards to their upstream business, Alcoa has predicted a global aluminum deficit of 1.1 million metric tons and an alumina deficit of 2.8 million metric tons. These predictions are influenced by the curtailments of companies, including Alcoa, operating in these markets
that have been severally impacted by low prices and demand. Additionally, they believe demand for aluminum in 2016 will reach an all-time record of 60.5 million metric tons, which is a 5% increase from 2015. Alumina: Even with an unfavorable price drop of 43% for alumina in 2015, Alcoa was able to increase its after-tax operating income (ATOI) from $370 million in 2014 to $746 million in 2015, even as it saw its third party sales slip slightly from $3.509 billion to $3.455 billion respectively. Moving forward, Alcoa has announced an aggressive strategy to remove approximately 25% of its smelting capacity and approximately 20% of operating refining capacity by mid-2016 which should help them cut costs and increase margins starting in 2017. We are predicting some turbulence in the future for the Alumina division of Alcoa due continually suppressed prices, and tight margins. Over the next 3 years, we believe the Primary Metals division will have sales growth from -5.8% to 1.2% for the next three years. Additionally, they will be weighed down by cut production from the Alumina Division due to production cuts, and facility closings.10
Primary Metals: Third Party sales during 2015 dropped substantially by 21.6% which is attributable to not only a decrease in aluminum production of 314 kmt, but also the average price per metric. It dropped 14% from $2,405 per metric ton to $2,069 per metric ton. With aluminum prices heavily dependent on economic growth, specifically China, Alcoa faces strong headwinds moving forward as we predict China will continue a slower growth in the near term. We are predicting some turbulence in the future for the Alumina division of Alcoa due to continually suppressed prices, and tight margins. Over the next 3 years, we believe the Primary Metals division will slow down production due to the curtailment and closing of refineries from the Alumina Division due to production cuts and facility closings. This being said, we are predicting sales growth from -5.8% to 1.2% for the next three years. Global Rolled Products: This segment is the largest revenue stream for Alcoa accounting for 27.7% of sales. However, sales declined during the 2015 fiscal year as economic slowdown has affected demand for products such as sheet metal in emerging markets, and more specifically, China.
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Although Alcoa does only a small fraction of its sales in China, this suppressed demand has a direct impact on the market price for their products. On the upside, automotive sheet shipments doubled compared to 2014 as Alcoa has secured contracts with Ford, Fiat Chrysler Automobiles, and General Motors to provide aluminum sheet for automobile production. Engineered Products and Solutions: In FY 2015, Engineered Products and Solutions saw the most significant increase in sales of 26.7% year-over-year, accompanied by a slight increase in ATOI from $579 million in 2014 to $595 million in 2015. The main driver for this increase was due to a rise in aerospace revenues of 34%. During 2015, Alcoa was also able to secure approximately $9 billion in aerospace contracts which is more than double the amount in 2014. We are expecting for Alcoa’s aerospace operations to grow in the range of 8 - 16.2% over the next 3 years due to a seven year backlog for new airplanes, and Alcoa’s aggressive expansion into the industry. Transportation and Construction: While sales slipped to $1.882 billion in 2015, down 6.9% year-over-year, fourth quarter sales were up 5% year-over-year accompanied by an EBITDA margin increase to 14.6% from 12.6%. Although it is a new division of the company, we have optimism from this small division of the company predicting growth from 2.8% - 5.5% for the next three years. Catalysts for Growth/Change:
Global Growth- Global growth, specifically in emerging markets, is a major catalyst for aluminum moving forward. In 2015, China experienced 6.9% growth, which is the slowest it has been in 25 years1. Slowing economic growth means less construction projects and manufacturing as a whole. As a result, less aluminum is demanded.
Domestic Growth Opportunities- Domestically, increased demand of products in industries such as aerospace, automotive and construction building will have a significant impact on industry revenues. Because all of these industries are highly cyclical, the demand for aluminum used in their products is cyclical as well. For aluminum to truly grow as an industry, however, aluminum companies need to continue to find new ways to incorporate aluminum into other industries products. Throughout its history, aluminum companies have been
finding increasingly more ways to use aluminum in place of other metals and materials. Alcoa SWOT Analysis: Strengths: Engineered Products and Solutions The Engineered Products and Solutions was particularly strong in 2015, with Alcoa closing $9 billion in aerospace contracts over a multiple year period with companies such as Boeing, Airbus, and Lockheed Martin. The Lockheed Martin deal was directly related to Alcoa’s acquisition of RTI International Metals Incorporated.1 Alcoa’s $1.5 billion deal with General Electric was also related to aerospace, with Alcoa agreeing to supply nickel-based supply alloy and titanium to General Electric’s aviation unit. Revenues in Alcoa’s aerospace division increased 34% year over year.2 In a time when the aluminum industry as a whole has plummeted, Alcoa’s aerospace division remained a bright spot in an otherwise relatively dismal year. Fully Integrated across Aluminum Industry Being fully integrated across the aluminum industry gives Alcoa a significant competitive advantage over its competitors. Because they are able to mine bauxite and turn it into aluminum internally, Alcoa does not have to rely on third party sellers like many of its competitors have to. This means that Alcoa is less impacted by price increases in aluminum and more flexible with managing the amount of raw materials. Another benefit Alcoa has it that by having multiple divisions with different products, they are in a way diversifying their risk. The drop in aluminum prices adversely affected Alcoa less than a purely primary aluminum company. Weaknesses: Cutting Costs in Upstream Divisions The drop in Aluminum prices has forced Alcoa to take aggressive steps in its upstream divisions to cut costs. In the Q4 report, Alcoa announced curtailments and closures of approximately 25 percent operating smelting and approximately 20 percent operating refining capacity in 2015. Once all of the above actions are implemented, Alcoa globally will have 2.1 million metric tons of operating smelting capacity and 12.3 million metric tons of operating refining capacity remaining2. This resulted in around $565 million being expensed under special items on the income statement.
Opportunities Automobile Industry By 2025, more than 75 percent of pickup trucks, and 20 percent of SUVs and large sedans produced in North America will be aluminum-bodied guaranteeing 50 years
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of uninterrupted growth3. With aluminum becoming increasingly more common in the automotive industry, Alcoa has seen the sales of its aluminum sheets steadily rise. In 2015, aluminum automotive sheets increased by 18% and EBITDA per metric ton grew by 19%. Alcoa expects this segment to continue to grow, due to aluminum being lighter and more fuel efficient than its steel counterpart. Transportation and Construction Building In July of 2015, Alcoa decided to split its Engineered and Product Solutions division in half, separating the aerospace portion away from the transportation and construction building segment. The primary reason this was done is because the aerospace has and will continue to grow rapidly as Alcoa becomes a premier aerospace partner. However, Alcoa also believes that the Transportation and Construction Building division will drive successful expansion into emerging regional markets, where both these business units have significant opportunity, in addition to capturing continued growth in existing markets4. Q4 had EBITDA margin of 14.6% and was up 5% year over year.
Threats: Cyclical Nature The aluminum Industry as a whole is highly cyclical, and is significantly affected by changed in the global economy and its end-use markets. Alcoa sells many products to industries that are cyclical, such as the commercial construction and transportation industries, and the demand for its products is sensitive to, and quickly impacted by, demand for the finished goods manufactured by its customers in these industries, which may change as a result of changes in the general U.S. or worldwide economy, currency exchange rates, energy prices or other factors beyond its control5.
Competition Alcoa not only has to compete with other aluminum companies, but also other materials-such as steel and plastics for automotive and building applications; magnesium, titanium, composites, and plastics for aerospace and defense applications6. This is significant because unlike industries like retail, Alcoa customers are large corporations. Losing its customers to other aluminum or metal companies will significantly decrease profits. Foreign Currency Exchange Rates Changes in the valuation of the U.S. dollar against other currencies, particularly the Australian dollar, Brazilian
real, Canadian dollar, Euro and Norwegian kroner, may affect Alcoa’s profitability as some important inputs are purchased in other currencies, while the Company’s upstream products are generally sold in U.S. dollars. Alcoa’s value-add company will be negatively impacted by the strength of the dollar. It gets a major portion of its revenues from Europe and is thus negatively impacted by a stronger US dollar7. Commodities such as aluminum also have an inverse relationship with the U.S Dollar. When the U.S dollar strengthens, aluminum prices drop, which negatively affects Alcoa’s business.
We have conducted extensive research on Alcoa Inc. and from our findings, we are recommending a HOLD on the company. Although Alcoa has underperformed the S&P 500 Index for the past 5 years, we believe that holding Alcoa Inc. to play the split of the company would benefit the portfolio. Within our model, we created a discounted cash flow (DCF) and Economic Profit (EP) valuation which gave us a stock price of $13.58, insinuating the stock is undervalued. Using the dividend discount approach (DDM), the stock price that we computed was $6.87, which is almost 30% lower than the current trading level. The final valuation model we created was a relative valuation. By using the price to sales approach, we were given a stock price of $12.86. After reading through Alcoa’s 10k and learning more about the industry that they operate within, and how they are evolving their business model, we believe that the DCF approach to valuing the company is slightly high, but appropriate for the growth in their Value Add business. Revenue Decomposition We forecasted Alcoa’s sales by breaking down each business unit, and trying to not only understand management’s goals, but how those goals are effected by the industry in which they operate. For FY 2016, we have projected a sales contraction of -5.93% year over year. The major reasoning for this was due to Alcoa’s continued effort to curtail their Upstream Business. By cutting production and closing facilities, we feel that the upstream business will have a choppy year. As of Q1 2016, Alcoa missed analyst estimates, most notably due to continually low aluminum prices. Primary Metals is also another area of the business that we foresee having a tough year. With slowed growth in China and more supply of aluminum and other basic materials, it has caused prices to fall, thus hurting Alcoa’s bottom line. We forecasted sales contractions in
Valuation Analysis
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2016 and 2017 of -12% and -7.50% respectively. However, we feel confident that these two business segments will rebuttal in 2018, with stronger growth in the global economy. The Value Add segments are showing strong sales growth year over year as Alcoa continues growing that business. With strong sales growth in these segments in the past few years, coupled with the new acquisitions of RTI International Metals, Firth Rixson, and TITAL, we feel that Alcoa will continue to expand this part of the business due to the high demand for aluminum products in the aerospace and automobile industries. COGS and SGA Originally when we started the project, we used the historical level of COGS and SGA as a percentage of sales at 82.4% and 4.52% respectively. However, Alcoa’s management team has repeatedly told investors that they are aggressively trying to cut costs, so we decided to lower the percentage slightly to 81.75% and 4.3% respectively to accommodate to that goal. WACC To calculate Alcoa’s WACC, we used 5 years of month returns compared to the S&P 500. We decided this would be an appropriate metric to avoid data in a shorter time period which would show much more volatility of the stock. We used the risk free rate on a 20 year T-Note at 2.26%, and a recent bond issue from Alcoa at 7.37% to get the risk premium. We felt that a WACC of 6.9% was reasonable for the company in the time frame that we have been evaluating them CV Growth After analyzing our model, we believe that Alcoa will have a CV of 3.1%. This is realistic in the sense that the economy typically grows in that area. We do not see Alcoa as a company that is going to grow substantially during our forecast horizon. Considering that they are a well-established company as well, it does not seem logical for them to grow significantly more than that.
We have conducted a sensitivity analyst to show how the assumptions that we made have a significant impact on the price of the stock. The variables that we chose are ones that can quickly change in time, and we thought it made sense to test how those changes would positively or negatively impact Alcoa. COGS as a % of Sales vs. SGA Expense as a % of Sales
We found this table to be a great representation showing how a slight change in either of these expenses can have a substantial impact on the company. If Alcoa is able to achieve their goal and lower the expenses, this table gives us some insight in to how a share of the company would change.
Risk Free Rate vs. Risk Premium This table is important to the capital structure of Alcoa and their operations. We are able to see how different interest rates would affect the market price regarding Alcoa. Because they operate in a cyclical industry, with high fixed costs, paying attention to this table is pivotal in deciding how to finance Alcoa’s operations.
Beta vs. Risk Premium From this table, we can see the benefit that a lower risk premium brings for the share price. As we move from the top left, to the bottom right, the perceived risk to the investor increases and thus they will be less likely to buy. The risk and beta of a stock can show how much an investor is willing to pay for the risk given.
13.58$ 78.00% 79.00% 80.00% 81.75% 83.00% 84.00% 85.00%3.00% 26.06 23.59 21.12 16.79 13.71 11.23 8.763.50% 24.82 22.35 19.88 15.56 12.47 10.00 7.534.00% 23.59 21.12 18.65 14.32 11.23 8.76 6.294.30% 22.85 20.38 17.91 13.58 10.49 8.02 5.555.00% 21.12 18.65 16.18 11.85 8.76 6.29 3.825.50% 19.88 17.41 14.94 10.62 7.53 5.06 2.596.00% 18.65 16.18 13.71 9.38 6.29 3.82 1.35
COGS % of Sales
SG
A %
of S
ales
13.58$ 4.80% 4.90% 5.00% 5.11% 5.20% 5.30% 5.40%2.00% 15.60 15.18 14.78 14.36 14.02 13.66 13.322.10% 15.26 14.85 14.46 14.05 13.73 13.38 13.042.20% 14.92 14.53 14.15 13.75 13.44 13.10 12.782.26% 14.73 14.34 13.97 13.58 13.27 12.94 12.622.40% 14.29 13.92 13.57 13.19 12.89 12.57 12.262.50% 13.99 13.63 13.28 12.92 12.63 12.32 12.022.60% 13.69 13.35 13.01 12.66 12.38 12.07 11.78
Risk Premium
Ris
k Fr
ee R
ate
13.58$ 4.80% 4.90% 5.00% 5.11% 5.20% 5.30% 5.40%1.05 17.80 17.36 16.94 16.49 16.14 15.76 15.391.10 16.82 16.40 15.99 15.56 15.22 14.86 14.511.15 15.92 15.51 15.12 14.71 14.38 14.03 13.701.22 14.73 14.34 13.97 13.58 13.27 12.94 12.621.30 13.61 13.24 12.89 12.52 12.23 11.91 11.611.35 12.95 12.59 12.25 11.89 11.61 11.30 11.011.40 12.33 11.98 11.65 11.30 11.03 10.73 10.45
Risk Premium
Bet
a
Sensitivity Analysis
10
Important Disclaimer
11
References 1(n.d.). Retrieved from Alcoa Inc.: 1.
http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20160111000314en&newsYear=2016
2(n.d.). Retrieved from FORBES: http://www.forbes.com/sites/greatspeculations/2014/03/28/examining-alcoas-alumina-business/#4a3498e326d0
3(n.d.). Retrieved from SEC: https://www.sec.gov/Archives/edgar/data/4281/000119312515054376/d836461d10k.htm
4Alcoa Inc. (n.d.). Retrieved from Reuters : http://www.reuters.com/finance/stocks/companyProfile?symbol=AA
5Alcoa Reports First Quarter 2016 Results. (2016, 04 11). Retrieved from http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20160411000330en&detailType=invest&newsYear=2016
6Alcoa SEC Filings: 2016. (n.d.). Retrieved from Alcoa.com: http://www.alcoa.com/global/en/investment/sec_filings.asp
7Brewer, R. (n.d.). Alcoa Won Big in 2015. Retrieved from Fool.com: http://www.fool.com/investing/general/2016/01/26/alcoa-won-big-in-2015-in-aerospace.aspx?source=iedfolrf0000001
8National GDP. (2016). Retrieved from BEA.gov: http://www.bea.gov/newsreleases/national/gdp/2016/gdp4q15_3rd.htm
9Reuters. (2016, 04 18). China Quarterly Economic Growth. Retrieved from http://fortune.com/2016/04/18/china-quarterly-economic-growth/
10Trop, J. (n.d.). Toyota's Big Leap to Aluminum. Retrieved from Automotive News: http://www.autonews.com/article/20140922/OEM01/309229953/toyotas-big-leap-to-aluminum
11 Tang, S. (n.d.) PBOC: Our big easing nothing like ECB’s, Fed’s QEhttp://www.cnbc.com/2015/10/26/pboc-says-
rate-rrr-cuts-not-like-ecb-fed-has-more-flexibility-on-policy.html
12All numbers within the model were taken from Factset.com and Bloomberg.com
Alcoa Inc.Revenue Decomposition
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CVRevenue by Product Segment
Alumina 5,402 5,450 5,142 4,371 3,999 4,047 4,161 4,306 4,478 4,657
Primary Metals 9,217 9,731 7,761 6,830 6,317 6,393 6,515 6,694 6,945 7,188
Globally Rolled Products 7,284 7,536 6,363 6,713 7,250 8,011 8,572 9,052 9,532 10,008
Engineered Products and Solutions 4,054 4,217 5,342 5,689 6,469 7,517 8,328 8,928 9,410 9,881
Transportation and Construction Solutions 1,951 2,021 1,882 1,938 2,045 2,158 2,289 2,420 2,543 2,683
Adjustments (4,876) (5,049) (3,956) (4,344) (4,813) (5,410) (5,713) (6,135) (6,724) (7,363)
Sales on Income Statement 23,032 23,906 22,534 21,197 21,268 22,716 24,152 25,264 26,184 27,054
% of Revenue by Product Segment
Alumina 19.36% 18.82% 19.41% 17.11% 15.33% 14.39% 13.93% 13.71% 13.61% 13.53%
Primary Metals 33.03% 33.61% 29.30% 26.74% 24.22% 22.73% 21.81% 21.32% 21.10% 20.88%
Globally Rolled Products 26.10% 26.03% 24.02% 26.28% 27.80% 28.48% 28.70% 28.83% 28.96% 29.08%
Engineered Products and Solutions 14.53% 14.56% 20.17% 22.27% 24.80% 26.72% 27.89% 28.43% 28.59% 28.71%
Transportation and Construction Solutions 6.99% 6.98% 7.10% 7.59% 7.84% 7.67% 7.67% 7.71% 7.73% 7.80%
Total Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Growth by Product Segment
Alumina 0.00% 0.89% -5.65% -15.00% -8.50% 1.20% 2.80% 3.50% 4.00% 4.00%
Primary Metals -10.59% 5.58% -20.24% -12.00% -7.50% 1.20% 1.90% 2.75% 3.75% 3.50%
Globally Rolled Products -3.41% 3.46% -15.57% 5.50% 8.00% 10.50% 7.00% 5.60% 5.30% 5.00%
Engineered Products and Solutions -26.62% 4.02% 26.68% 6.50% 13.70% 16.20% 10.80% 7.20% 5.40% 5.00%
Transportation and Construction Solutions - 3.59% -6.88% 3.00% 5.50% 5.50% 6.10% 5.70% 5.10% 5.50%
Total Sales Growth -2.82% 3.79% -5.74% -5.93% 0.33% 6.81% 6.32% 4.60% 3.64% 3.32%
Alcoa Inc.Income Statement
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
Sales 23,032 23,906 22,534 21,197 21,268 22,716 24,152 25,264 26,184 27,054
Cost of Goods Sold 19,286 19,137 18,069 17,329 17,386 18,571 19,744 20,654 21,405 22,117
Selling, general administrative, and other expenses 1,008 995 979 911 915 977 1,039 1,086 1,126 1,163
Research & Development Expenses 192 218 238 181 182 194 206 216 224 231
Depreciation 1,348 1,302 1,203 1,111 1,119 1,129 1,142 1,157 1,175 1,196
Amortization of Intangibles 73 69 77 61 61 66 70 73 76 78
Impairment of goodwill 1,731 - 25 - - - - - - -
Reorganization and Restructure Expense 782 1,168 1,195 636 638 341 362 379 393 406
Interest Expense 453 473 498 671 690 713 733 740 775 738
Other Income (Expense) (25) 47 2 141 139 101 100 66 125 112
Total costs and expenses 24,848 23,409 22,286 21,042 21,129 22,091 23,397 24,371 25,299 26,041
Income from continuing operations before taxes on income (1,816) 497 248 155 138 625 755 893 885 1,013
Provision for Income Taxes 428 320 445 55 49 221 267 316 313 359
Net (Loss) Income (2,244) 177 (197) 100 89 404 488 577 572 654
Less: Net (Loss) income attributable to noncontrolling interests 41 (91) 125 - - - - - - -
Net Income Attributable to Alcoa (2,283) 268 (322) 100 89 404 488 577 572 654
Total Shares Outstanding 1,071 1,217 1,310 1,391 1,391 1,390 1,390 1,390 1,390 1,389
Dividends Per Share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.14
Dividends Paid 129 146 157 167 167 195 195 195 195 195
Earnings (loss) per Common Share (167) (167) (195) (195) (195) (195) (195)
Basic: -$2.14 $0.21 -$0.31 $0.07 $0.06 $0.29 $0.35 $0.42 $0.41 $0.47
Income Statement
Alcoa Inc.
Balance Sheet
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
Cash & Short-Term Investments 1,437 1,877 1,919 1,882 1,368 1,362 891 1,695 1,521 1,532
Receivables from customers, less allowances of $13 in 2015 and $14 in 2014 (U) 1,221 1,395 1,340 1,696 1,701 1,817 1,932 2,021 2,095 2,164
Other Receivables 597 733 522 530 532 568 604 632 655 676
Inventories 2,705 3,082 3,442 2,650 2,658 2,840 3,019 3,158 3,273 3,382
Prepaid Expenses and Other Current Assets 1,009 1,182 730 909 912 975 1,036 1,084 1,123 1,161
Total Current Assets 6,969 8,269 7,953 7,667 7,172 7,561 7,482 8,590 8,667 8,915
Property, Plant & Equipment, Net 17,639 16,426 14,815 14,917 15,054 15,227 15,433 15,673 15,945 16,248
Property, Plant & Equipment, Gross 36,866 35,517 33,687 34,900 36,156 37,458 38,806 40,203 41,651 43,150
Property, Plant & Equipment, Depreciation 19,227 19,091 18,872 19,983 21,102 22,231 23,373 24,530 25,706 26,902
Goodwill 3,415 5,247 5,401 5,563 5,563 5,563 5,563 5,563 5,563 5,563
Intangible Assets 399 737 1,158 1,097 1,035 970 900 827 752 673
Investments 2,127 2,107 2,693 2,895 3,112 3,346 3,596 3,866 4,156 4,468
Long-Term Note Receivable 339 294 233 209 210 224 238 249 258 267
Deferred Income Taxes 3,184 2,754 2,668 2,547 2,555 2,729 2,902 3,036 3,146 3,251
Other Non Current Assets 1,670 1,565 1,607 1,807 1,813 1,936 2,059 2,153 2,232 2,306
Total Assets 35,742 37,399 36,528 36,701 36,515 37,556 38,173 39,957 40,718 41,691
Short Term Borrowing 57 54 38 56 57 60 63 66 68 70
Current Portion of Long Term Debt Due within Year 655 29 21 771 1,039 1,140 1,018 1,318 664 581
Accounts Payable 2,960 3,152 2,889 2,342 2,350 2,510 2,669 2,792 2,893 2,990
Accrued Compensation and Retirement Costs 1,013 937 850 842 844 902 959 1,003 1,040 1,074
Taxes, including income taxes 376 348 239 382 383 409 435 455 471 487
Miscellaneous Current Liabilities 1,044 1,021 1,174 1,085 1,088 1,162 1,236 1,293 1,340 1,384
Total Current Liabilities 6,105 5,541 5,211 5,477 5,761 6,183 6,379 6,926 6,476 6,586
Long-Term Debt, less amount due within one year 7,607 8,769 9,044 8,537 8,584 8,750 8,965 9,133 9,285 9,432
Provision for Risks & Charges 5,537 5,446 6,787 5,723 5,317 5,384 5,724 5,988 6,206 6,412
Deferred Tax Liabilities - - - 51 45 204 246 291 288 330
Deferred Income 101 93 84 106 106 114 121 126 131 135
Other Liabilities (excl. Deferred Income) 2,870 2,756 1,271 2,430 2,342 2,152 1,475 1,681 1,996 1,896
Total Liabilities 22,220 22,605 22,397 22,324 22,156 22,786 22,910 24,144 24,381 24,791
Preferred Stock (Carrying Value) 55 58 58 58 58 58 58 58 58 58
Common Stock and Additional Paid in Capital 8,687 10,588 11,410 11,462 11,514 11,567 11,619 11,671 11,723 11,736
Retained Earnings 9,272 9,379 8,834 8,768 8,690 8,899 9,193 9,575 9,952 10,412
Other Comprehensive Income (3,659) (4,677) (5,431) (5,431) (5,431) (5,431) (5,431) (5,431) (5,431) (5,431)
Treasury Stock (3,762) (3,042) (2,825) (2,825) (2,825) (2,825) (2,825) (2,825) (2,825) (2,825)
Total Shareholders' Equity 10,593 12,306 12,046 12,032 12,006 12,268 12,614 13,048 13,478 13,951
Minority Interest 2,929 2,488 2,085 2,183 2,191 2,340 2,488 2,602 2,697 2,787
Total Equity 13,522 14,794 14,131 14,215 14,197 14,608 15,101 15,650 16,175 16,737
Total Liabilities & Shareholders' Equity 35,742 37,399 36,528 36,539 36,353 37,394 38,011 39,795 40,556 41,529
Assets
Liabilities & Shareholders' Equity
Alcoa Inc.Cash Flow Statement
Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022CVCash Flows From Operating Activities
Net Income 100 89 404 488 577 572 654
Adjustments to Reconcile Net Income
Depreciation 1,111 1,119 1,129 1,142 1,157 1,175 1,196
Change in Receivables (356) (6) (116) (115) (89) (74) (70)
Change in Inventories 792 (9) (181) (180) (139) (115) (109)
Change in Prepaid Expenses (179) (3) (62) (62) (48) (39) (37)
Change in Other Receivables (8) (2) (36) (36) (28) (23) (22)
Change in Intangible Assets 61 61 66 70 73 76 78
Change in Deferred Income Taxes 121 (8) (174) (173) (134) (110) (105)
Changine in Accounts Payable (547) 8 160 159 123 102 96
Change in Accrued Compensation and Retirement Costs (8) 3 58 57 44 37 35
Change in Miscellaneous Liabilities (89) 4 74 73 57 47 45
Change in Taxes, including Income Taxes 143 1 26 26 20 17 16
Change in Other Non Current Liabilites 1,159 (88) (190) (677) 206 315 (100)
Change in Deferred Income 22 0 7 7 6 5 4
Change in Provisions for Risk and Charges (1,064) (406) 67 340 264 218 206
Change in Deferred Taxes 51 (6) 159 42 45 (3) 42
Change in Short-Term Debt 18 1 3 4 3 2 2
Cash Flows From Operating Activities 1,327 759 1,392 1,167 2,137 2,201 1,931
Cash Flows from Investing ActivitiesChange in Investments (202) (217) (233) (251) (270) (290) (312)
Capital Expenditures (1,213) (1,256) (1,302) (1,348) (1,397) (1,447) (1,499)
Change in Other Non Current Assets (200) (6) (123) (122) (95) (78) (74)
Change in Minority Interests 98 7 149 148 115 95 90
Change in Long Term Notes Receivable 24 (1) (14) (14) (11) (9) (9)
Cash Flows from Investing Activities (1,492) (1,473) (1,524) (1,588) (1,658) (1,730) (1,804)
Cash Flows From Financing ActivitiesDividends (167) (167) (195) (195) (195) (195) (195)
Change in Long Term Debt (507) 47 166 215 168 152 148
Change in Current Portion of Long Term Debt Due Within One Year 750 268 101 (122) 300 (654) (83)
Change in Common Stock 52 52 52 52 52 52 13
Cash Flows From Financing Activities 128 201 125 (50) 325 (644) (117)
Change in Cash (37) (514) (7) (471) 804 (174) 11
Beginning Cash 1,919 1,882 1,368 1,362 891 1,695 1,521
Ending Cash 1,882 1,368 1,362 891 1,695 1,521 1,532
Alcoa Inc.Income Statement
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of Goods Sold 83.74% 80.05% 80.19% 81.75% 81.75% 81.75% 81.75% 81.75% 81.75% 81.75%
Selling, general administrative, and other expenses 4.38% 4.16% 4.34% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30%
Research & Development Expenses 0.83% 0.91% 1.06% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%
Depreciation 5.85% 5.45% 5.34% 5.24% 5.26% 4.97% 4.73% 4.58% 4.49% 4.42%
Amortization of Intangibles 0.32% 0.29% 0.34% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29%
Impairment of goodwill 7.52% 0.00% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Reorganization and Restructure Expense 3.40% 4.89% 5.30% 3.00% 3.00% 1.50% 1.50% 1.50% 1.50% 1.50%
Interest Expense 1.97% 1.98% 2.21% 3.16% 3.24% 3.14% 3.04% 2.93% 2.96% 2.73%
Other Income (Expense) -0.11% 0.20% 0.01% 0.67% 0.65% 0.44% 0.42% 0.26% 0.48% 0.41%
Total costs and expenses 107.88% 97.92% 98.90% 99.27% 99.35% 97.25% 96.87% 96.46% 96.62% 96.26%
Income from continuing operations before taxes on income -7.88% 2.08% 1.10% 0.73% 0.65% 2.75% 3.13% 3.54% 3.38% 3.74%
Provision for Income Taxes 1.86% 1.34% 1.97% 0.26% 0.23% 0.97% 1.11% 1.25% 1.20% 1.33%
Net (Loss) Income -9.74% 0.74% -0.87% 0.47% 0.42% 1.78% 2.02% 2.28% 2.18% 2.42%
Less: Net (Loss) income attributable to noncontrolling interests 0.18% -0.38% 0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Income Attributable to Alcoa -9.91% 1.12% -1.43% 0.47% 0.42% 1.78% 2.02% 2.28% 2.18% 2.42%
Income Statement
Alcoa Inc.Balance Sheet
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
Cash & Short-Term Investments 6.2% 7.9% 8.5% 6.10% 6.10% 6.10% 6.10% 6.10% 6.10% 6.10%
Receivables from customers, less allowances of $13 in 2015 and $14 in 2014 (U) 5.3% 5.8% 5.9% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Other Receivables 2.6% 3.1% 2.3% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Inventories 11.7% 12.9% 15.3% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50%
Prepaid Expenses and Other Current Assets 4.4% 4.9% 3.2% 4.29% 4.29% 4.29% 4.29% 4.29% 4.29% 4.29%
Total Current Assets 30.26% 34.59% 35.29% 33.39% 33.39% 33.39% 33.39% 33.39% 33.39% 33.39%
Property, Plant & Equipment, Net 76.58% 68.71% 65.75% 66.20% 66.81% 67.57% 68.49% 69.55% 70.76% 72.11%
Property, Plant & Equipment, Gross 160.06% 148.57% 149.49% 154.88% 160.45% 166.23% 172.21% 178.41% 184.83% 191.49%
Property, Plant & Equipment, Depreciation 0.20% -0.77% -1.33% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Goodwill 11.24% 17.27% 17.78% 18.31% 18.31% 18.31% 18.31% 18.31% 18.31% 18.31%
Intangible Assets 1.73% 3.08% 5.14% 5.17% 4.87% 4.27% 3.73% 3.27% 2.87% 2.49%
Investments 9.23% 8.81% 11.95% 12.85% 13.81% 14.85% 15.96% 17.16% 18.44% 19.83%
Long-Term Note Receivable 1.47% 1.23% 1.03% 0.93% 0.93% 0.99% 1.06% 1.11% 1.15% 1.18%
Deferred Income Taxes 13.82% 11.52% 11.84% 11.30% 11.34% 12.11% 12.88% 13.47% 13.96% 14.43%
Other Non Current Assets 7.25% 6.55% 7.13% 8.02% 8.04% 8.59% 9.14% 9.56% 9.90% 10.23%
Total Assets 140.36% 134.49% 138.13% 137.85% 139.19% 141.78% 144.64% 147.50% 150.47% 153.65%
Short Term Borrowing 0.25% 0.23% 0.17% 0.23% 0.25% 0.25% 0.28% 0.28% 0.30% 0.29%
Current Portion of Long Term Debt 2.84% 0.12% 0.09% 3.23% 3.42% 4.35% 5.06% 4.26% 5.85% 2.78%
Accounts Payable 12.85% 13.18% 12.82% 9.80% 10.43% 10.50% 11.84% 11.68% 12.84% 12.51%
Accrued Compensation and Retirement Costs 4.40% 3.92% 3.77% 3.52% 3.75% 3.77% 4.26% 4.20% 4.61% 4.49%
Taxes, including income taxes 1.63% 1.46% 1.06% 1.60% 1.70% 1.71% 1.93% 1.90% 2.09% 2.04%
Miscellaneous Current Liabilities 4.53% 4.27% 5.21% 4.54% 4.83% 4.86% 5.48% 5.41% 5.95% 5.79%
Total Current Liabilities 26.51% 23.18% 23.13% 22.91% 24.38% 25.44% 28.85% 27.72% 31.64% 27.90%
Long-Term Debt, less amount due within one year 33.03% 36.68% 40.13% 35.71% 38.09% 36.60% 39.78% 38.20% 41.20% 39.46%
Provision for Risks & Charges 24.04% 22.78% 30.12% 23.94% 23.59% 22.52% 25.40% 25.05% 27.54% 26.82%
Deferred Tax Liabilities 0.00% 0.00% 0.00% 0.21% 0.20% 0.85% 1.09% 1.22% 1.28% 1.38%
Deferred Income 0.44% 0.39% 0.37% 0.44% 0.47% 0.48% 0.54% 0.53% 0.58% 0.57%
Other Liabilities (exclu. Deferred Income) 12.46% 11.53% 5.64% 10.17% 10.39% 9.00% 6.55% 7.03% 8.86% 7.93%
Total Liabilities 96.47% 94.56% 99.39% 93.38% 97.13% 94.89% 102.21% 99.74% 111.10% 104.05%
Preferred Stock (Carrying Value) 0.24% 0.24% 0.26% 0.24% 0.26% 0.24% 0.26% 0.24% 0.26% 0.24%
Common Stock and Additional Paid in Capital 37.72% 44.29% 50.63% 47.95% 51.10% 48.38% 51.56% 48.82% 52.03% 49.09%
Retained Earnings 40.26% 39.23% 39.20% 36.68% 38.56% 37.23% 40.79% 40.05% 44.17% 43.55%
Other Comprehensive Income -15.89% -19.56% -24.10% -22.72% -24.10% -22.72% -24.10% -22.72% -24.10% -22.72%
Treasury Stock -16.33% -12.72% -12.54% -11.82% -12.54% -11.82% -12.54% -11.82% -12.54% -11.82%
Total Shareholders' Equity 45.99% 51.48% 53.46% 50.33% 53.28% 51.32% 55.98% 54.58% 59.81% 58.36%
Accumulated Minority Interest 12.72% 10.41% 9.25% 10.30% 10.30% 10.30% 10.30% 10.30% 10.30% 10.30%
Total Equity 58.71% 61.88% 62.71% 60.63% 63.58% 61.62% 66.28% 64.88% 70.11% 68.66%
Total Liabilities & Shareholders' Equity 155.18% 156.44% 162.10% 154.01% 160.71% 156.51% 168.49% 164.63% 181.21% 172.71%
Assets
Liabilities & Shareholders' Equity
Alcoa Inc.Weighted Average Cost of Capital (WACC) Estimation
6.90%
Cost Of Equity (RE)Risk Free Rate 2.26%Risk Premium 5.11%Beta 1.223Cost of Equity 8.51%
Cost of Debt (RD)Cost of Debt 7.37%Marginal Tax Rate 35.40%After‐Tax Cost of Debt 4.76%
Cost of Preferred Stock (RP)Class A Shares Outstanding 546,024Preferred Dividends ‐ Class A 3.75$ Class A Share Price 87.92$ Cost of Preferred ‐ Class A 4.27%Class B Shares Outstanding 2,500,000 Preferred Dividends ‐ Class B 2.69$ Class B Share Price 32.79$ Cost of Preferred ‐ Class B 8.20%
WeightsTotal Common Shares Outstanding 1,310,160,141 Price Per Share $9.99Total Equity 13,088,499,808.59$ Total Debt Outstanding 9,794,581,756.85$ Total Preferred Stock ‐ Class A 48,006,430.08$ Total Preferred Stock ‐ Class B 81,975,000.00$ Total Value $23,013,062,995.52Weight of Equity 56.87%Weight of Debt 42.56%Weight of Preferred ‐ Class A 0.21%Weight of Preferred ‐ Class B 0.36%WACC 6.90%
Alcoa Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV NOPLAT Growth 3.10% CV ROIC 7.71% WACC 6.90% Cost of Equity 8.51%
Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022CVDiscount Period 1 2 3 4 5 6
DCF ModelFCF 1070 1287 915 891 974 1064
CV of FCF 29848
PV of FCF 1001 1126 749 682 698 713 19996
Value of Operating Assets 24965
Add: Excess Cash 1468
Add: Long-Term Note Receivable 233
Add: Investments 2693
Add: Minority Interest 2085
Add: Other Non Current Assets 1607
Subtract: ESOP (102)
Subtract: PV of Operating Leases (692)
Subtract: Short-Term Borrowing (38)
Subtract: Miscellaneous Current Liabilities (1174)
Subtract: Long-Term Debt (9065)
Subtract: Underfunded Pension Liabilities (3289)
Subtract: Other Liabilities (1271)
Value of Equity 17421
Total Shares Outstanding 1,310
Estimated Intrinsic Value per Share (as of 12/31/2015) 13.30$
Adjusted Intrinsic Value per Share as of 42479 13.58$
EP ModelFiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
EP 422 185 40 14 84 133 198CV of EP 5208
PV of EP 395 162 33 11 60 89 3489
Beginning Invested Capital 20727
PV of EP 4238
Add: Excess Cash 1468
Add: Long-Term Note Receivable 233
Add: Investments 2693
Add: Minority Interest 2085
Add: Other Non Current Assets 1607
Subtract: ESOP (102)
Subtract: PV of Operating Leases (692)
Subtract: Short-Term Borrowing (38)
Subtract: Miscellaneous Current Liabilities (1174)
Subtract: Long-Term Debt (9065)
Subtract: Underfunded Pension Liabilities (3289)
Subtract: Other Liabilities (1271)
Value of Equity 17421
Total Shares Outstanding 1,310
Estimated Intrinsic Value per Share (as of 12/31/2015) 13.30$
Adjusted Intrinsic Value per Share as of 42479 13.58$
Alcoa Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022CVDiscounted Period 1 2 3 4 5 6 7
EPS 0.07$ 0.06$ 0.29$ 0.35$ 0.42$ 0.41$ 0.47$
Key Assumptions
CV growth 1.66%
CV ROE 4.86%
Cost of Equity 8.51%
Future Cash Flows
P/E Multiple (CV Year) 21.21
EPS (CV Year) 0.47$
Future Stock Price 9.99
Dividends Per Share 0.12 0.12 0.14 0.14 0.14 0.14 0.14
Future Cash Flows 0.12 0.12 0.14 0.14 0.14 0.14 0.14
Discounted Cash Flows 0.11 0.10 0.11 0.10 0.09 0.09 6.12
Intrinsic Value 6.72$
Partial Year Adjustment 6.87$
Alcoa Inc.Key Management Ratios
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CV
Liquidity Ratios
Current Ratio Curr. Asset/Curr. Liab. 1.14 1.49 1.53 1.40 1.24 1.22 1.17 1.24 1.34 1.35
Quick Ratio (Cash+A/R+Investments)/Curr. Liab 0.70 0.94 0.87 0.92 0.78 0.76 0.70 0.78 0.83 0.84
Cash Ratio Cash/Curr. Liab 0.24 0.34 0.37 0.34 0.24 0.22 0.14 0.24 0.23 0.23
Activity or Asset-Management Ratios
Asset Turnover Sales/Total Assets 0.64 0.64 0.62 0.58 0.58 0.60 0.63 0.63 0.64 0.65
Inventory Convertation Ratio Sales/Inventory 8.51 7.76 6.55 8.00 8.00 8.00 8.00 8.00 8.00 8.00
Financial Leverage Ratios
Debt Ratio Total Liab./Total Assets 0.62 0.60 0.61 0.61 0.61 0.61 0.60 0.60 0.60 0.59
Debt to Equity Ratio Total Debt/ Total Equity 1.04 0.90 0.81 0.63 0.63 0.63 0.61 0.61 0.56 0.54
Interest Coverage Ratio Net Income/Interest Expense -5.04 0.57 -0.65 0.15 0.13 0.57 0.67 0.78 0.74 0.89
Profitability Ratios
Profit Margin Analysis Net Income/Sale -9.91% 1.12% -1.43% 0.47% 0.42% 1.78% 2.02% 2.28% 2.18% 2.42%
ROA (DuPont) Net Income/Avg. Total Assets -6.39% 0.72% -0.88% 0.27% 0.24% 1.08% 1.28% 1.44% 1.40% 1.57%
ROE (DuPont) Net Income/Avg. Shareholder Equity -26.28% 2.53% -2.82% 0.88% 0.78% 3.49% 4.20% 4.94% 4.88% 5.58%
Cash Flow Margin Net Operating Cash Flow/Sale 5.76% 3.17% 6.18% 5.50% 10.05% 9.69% 8.00%
Payout Policy Ratios
Payout Ratio DPS/EPS -0.06 0.57 -0.39 1.66 1.87 0.48 0.40 0.34 0.34 0.30
Total Payout (Div + Repurchases)/NI -0.08 0.74 -0.65 2.18 2.45 0.61 0.51
Dividend Coverage Net Income/ Dividends Paid -17.76 1.84 -2.05 0.60 0.54 2.08 2.51 2.97 2.94 3.36
13.58$ 4.80% 4.90% 5.00% 5.11% 5.20% 5.30% 5.40%2.00% 15.60 15.18 14.78 14.36 14.02 13.66 13.32
13.58$ 4.80% 4.90% 5.00% 5.11% 5.20% 5.30% 5.40% 2.10% 15.26 14.85 14.46 14.05 13.73 13.38 13.041.05 17.80 17.36 16.94 16.49 16.14 15.76 15.39 2.20% 14.92 14.53 14.15 13.75 13.44 13.10 12.781.10 16.82 16.40 15.99 15.56 15.22 14.86 14.51 2.26% 14.73 14.34 13.97 13.58 13.27 12.94 12.621.15 15.92 15.51 15.12 14.71 14.38 14.03 13.70 2.40% 14.29 13.92 13.57 13.19 12.89 12.57 12.261.22 14.73 14.34 13.97 13.58 13.27 12.94 12.62 2.50% 13.99 13.63 13.28 12.92 12.63 12.32 12.021.30 13.61 13.24 12.89 12.52 12.23 11.91 11.61 2.60% 13.69 13.35 13.01 12.66 12.38 12.07 11.781.35 12.95 12.59 12.25 11.89 11.61 11.30 11.011.40 12.33 11.98 11.65 11.30 11.03 10.73 10.45
13.58$ 2.80% 2.90% 3.00% 3.10% 3.20% 3.30% 3.40% 13.58$ 78.00% 79.00% 80.00% 81.75% 83.00% 84.00% 85.00%7.40% 13.02 13.06 13.10 13.15 13.19 13.24 13.30 3.00% 26.06 23.59 21.12 16.79 13.71 11.23 8.767.50% 13.14 13.19 13.24 13.29 13.35 13.41 13.47 3.50% 24.82 22.35 19.88 15.56 12.47 10.00 7.537.60% 13.26 13.31 13.37 13.43 13.50 13.57 13.64 4.00% 23.59 21.12 18.65 14.32 11.23 8.76 6.297.71% 13.38 13.45 13.51 13.58 13.66 13.73 13.81 4.30% 22.85 20.38 17.91 13.58 10.49 8.02 5.557.80% 13.49 13.56 13.63 13.71 13.79 13.87 13.96 5.00% 21.12 18.65 16.18 11.85 8.76 6.29 3.827.90% 13.60 13.67 13.75 13.84 13.93 14.02 14.12 5.50% 19.88 17.41 14.94 10.62 7.53 5.06 2.598.00% 13.70 13.79 13.87 13.96 14.06 14.16 14.27 6.00% 18.65 16.18 13.71 9.38 6.29 3.82 1.35
Risk Premium
Ris
k Fr
ee R
ate
COGS % of Sales
SG
A %
of S
ales
Risk Premium
Bet
a
NOPLAT growth
RO
IC
Alcoa Inc.Value Driver Estimation
Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022CVNOPLAT:Sales: 23,032 23,906 22,534 21197 21268 22716 24152 25264 26184 27054Cost of Goods Sold 19,286 19,137 18,069 17329 17386 18571 19744 20654 21405 22117SG & A Expense 1,008 995 979 911 915 977 1039 1086 1126 1163Depreciation, Depletion, and Amortization 1,348 1,302 1,203 1111 1119 1129 1142 1157 1175 1196R&D Expense 192 218 238 181 182 194 206 216 224 231Implied Interest on Operating Leases 53 50 51 52 56 60 65 69 74 80
EBITA 1251 2304 2096 1717 1722 1906 2085 2220 2328 2427Income Taxes 428 320 445 55 49 221 267 316 313 359Tax Shield on Interest Expense 157 153 176 237 244 253 260 262 274 261Tax on Other Income (Expense) ‐9 15 1 50 49 36 36 23 44 40Tax Shield on Amortized Goodwill 601 0 9 0 0 0 0 0 0 0Tax on Reorganization and Restructuring Expense 271 377 423 225 226 121 128 134 139 144Tax Shield on Interest Paid for Operating Leases 18 16 18 18 20 21 23 25 26 28
Adjusted Taxes 942 97 224 36 38 339 386 445 431 465Marginal Tax Rate Used: 34.70% 32.30% 35.40% 35.4% 35.4% 35.4% 35.4% 35.4% 35.4% 35.4%
Change in Deffered Taxes 146 430 86 172 ‐14 ‐15 ‐130 ‐89 ‐113 ‐63NOPLAT 455 2638 1958 1853 1670 1552 1569 1686 1784 1899
Invested CapitalOperating Current Assets:Cash ("Normal") 29 38 38 38 27 27 18 34 30 31Receivables from Customers, Net 1818 2128 1862 2226 2233 2385 2536 2653 2749 2841Inventory 2705 3082 3442 2650 2658 2840 3019 3158 3273 3382Prepaid Expenses and Other Assets 1009 1182 730 909 912 975 1036 1084 1123 1161
Operating Current Assets 5561 6430 6072 5822 5831 6226 6609 6929 7176 7414Operating Current Liabilities:Accounts Payable 2960 3152 2889 2342 2350 2510 2669 2792 2893 2990Accrued Compensation and Retirement Expenses 1013 937 850 842 844 902 959 1003 1040 1074Taxes, Including Income Taxes 376 348 239 382 383 409 435 455 471 487Other Current Liabilities: 1044 1021 1174 1085 1088 1162 1236 1293 1340 1384
Operating Current Liabilities 5393 5458 5152 4650 4665 4983 5298 5542 5744 5935Net Operating Working Capital 168 972 920 1172 1166 1243 1311 1386 1432 1479
Property, Plant, and Equipment (Net) 17639 16426 14815 14917 15054 15227 15433 15673 15945 16248PV of Operating Leases 719 681 692 719 748 778 809 841 875 910Other Noncurrent Assets 1670 1565 1607 1807 1813 1936 2059 2153 2232 2306Intangible Assets, Net 2127 2107 2693 2895 3112 3346 3596 3866 4156 4468Less Deferred Income 101 93 0 0 0 0 0 0 0 0
Invested Capital 22221 21658 20727 21510 21893 22530 23208 23920 24640 25411
NOPLAT 455 2638 1958 1853 1670 1552 1569 1686 1784 1899Beg. Invested Capital 23911 22221 21658 20727 21510 21893 22530 23208 23920 24640ROIC 1.9% 11.9% 9.0% 8.9% 7.8% 7.1% 7.0% 7.3% 7.5% 7.7%
Invested Capital Current Year 22221 21658 20727 21510 21893 22530 23208 23920 24640 25411Invested Capital Previous Year 23911 22221 21658 20727 21510 21893 22530 23208 23920 24640Change in Invested Capital ‐1689 ‐564 ‐931 783 383 637 678 712 720 771FCF 2145 3201 2888 1070 1287 915 891 974 1064 1128
Beg. Invested Capital 23911 22221 21658 20727 21510 21893 22530 23208 23920 24640ROIC 1.9% 11.9% 9.0% 8.9% 7.8% 7.1% 7.0% 7.3% 7.5% 7.7%WACC 6.2% 6.2% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%EP ‐1027 1260 462 422 185 40 14 84 133 198
Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)
Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 0 Leases2016 243 2015 205 2014 1982017 168 2016 172 2015 1652018 130 2017 131 2016 1352019 100 2018 101 2017 1032020 74 2019 79 2018 80Thereafter 138 Thereafter 165 Thereafter 244Total Minimum Payments 853 Total Minimum Payments 853 Total Minimum Payments 925Less: Interest 161 Less: Interest 172 Less: Interest 206PV of Minimum Payments 692 PV of Minimum Payments 681 PV of Minimum Payments 719
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 7.37% Pre‐Tax Cost of Debt 7.37% Pre‐Tax Cost of Debt 7.37%Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 3.1
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 243 226.3 1 205 190.9 1 198 184.42 168 145.7 2 172 149.2 2 165 143.13 130 105.0 3 131 105.8 3 135 109.14 100 75.2 4 101 76.0 4 103 77.55 74 51.9 5 79 55.4 5 80 56.16 & beyond 74 87.4 6 & beyond 79 103.7 6 & beyond 80 148.3PV of Minimum Payments 691.6 PV of Minimum Payments 681.0 PV of Minimum Payments 718.5
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 23Average Time to Maturity (years): 5.25Expected Annual Number of Options Exercised 4
Current Average Strike Price: 11.82$ Cost of Equity: 8.51%Current Stock Price: $9.99
2016E 2017E 2018E 2019E 2020E 2021E 2022CVIncrease in Shares Outstanding: 4 4 4 4 4 4 1
Average Strike Price: 11.82$ 11.82$ 11.82$ 11.82$ 11.82$ 11.82$ 11.82$
Increase in Common Stock Account: 52 52 52 52 52 52 13
Change in Treasury Stock 0 0 0 0 0 0 0
Expected Price of Repurchased Shares: 9.99$ 10.84$ 11.76$ 12.76$ 13.85$ 15.03$ 16.31$
Number of Shares Repurchased: - - - - - -
Shares Outstanding (beginning of the year) 1,310,160 1,310,165 1,310,169 1,310,173 1,310,178 1,310,182 1,310,187
Plus: Shares Issued Through ESOP 4 4 4 4 4 4 1
Less: Shares Repurchased in Treasury - - - - - - -
Shares Outstanding (end of the year) 1,310,165 1,310,169 1,310,173 1,310,178 1,310,182 1,310,187 1,310,188
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol AACurrent Stock Price $9.99Risk Free Rate 2.26%Current Dividend Yield 1.20%Annualized St. Dev. of Stock Returns 38.80%
Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 33 11.91 6.08 3.09$ 102$
‐$ Total 33 11.91$ 6.08 3.54$ 102$
Alcoa Inc.Relative Valuation Models
Ticker Company Price Market Cap. (in Millions) Sales 2016E Sales 2017E P/S 16 P/S 17NHYDY Norsk Hydro ASA $4.04 8,250,000,000 9,800,000,000 9,960,000,000 0.84 0.83 ACH Aluminum Corp of China ADR $8.65 4,740,000,000 17,730,000,000 122,400,000,000 0.27 0.04 KALU Kaiser Aluminum Corporation $86.49 1,560,000,000 1,380,000,000 1,430,000,000 1.13 0.97 CSTM Constellium N.V $5.43 572,740,000 5,120,000,000 5,570,000,000 0.11 0.10 CENX Century Aluminum Co. $7.28 633,650,000 1,310,000,000 1,310,000,000 0.48 0.48 RIO Rio Tinto $31.67 56,950,000,000 32,020,000,000 34,560,000,000 1.78 1.65
0.77 0.68
AA Alcoa Inc. $9.99 $12,662,000,000.00 $21,197,347,000.00 $21,267,570,206.00 0.60 0.60
Implied Value:P/S (EPS16) $ 12.86 P/S (EPS17) 11.37$
*Source: Yahoo! Finance and MarketWatch.com as of PUT DATE HERE
