Sterne Agee Raises Alco Price Target 20% On Acquisition

Shares of Alcoa AA jumped 2.7 percent Thursday after the acquisition of Firth Rixon was announced.

The $2.85 billion acquisition will enable to Alcoa to significantly increase its exposure to the aerospace industry.

Sterne Agee likes the acquisition, increasing its earnings estimates and target price. The note starts by stating, “We believe Alcoa's ~$5 billion aerospace exposure provides the next leg, with the Firth acquisition only accentuating this opportunity. Therefore, by incorporating Firth as well as an improving aerospace outlook we are raising our price target to $18 from $15, and reiterate a Buy rating.”

Related: Stifel Nocolaus Commetns On Alcoa Acquisition Of Firth Rixon

Regarding the cost of the acquisition, Sterne Agee does not think Alcoa overpaid. A key reason is that Alcoa has many aerospace projects under development that will be accelerated by the inclusion of Firth Rixon.

The price target increase from $15 to $18 is based 19 times 2016 projected earnings and eight times EV/EBITDA.