Alcoa Riding the Auto Wave, but Price Hurts - Analyst Blog

On Apr 10, we issued an updated research report on U.S. aluminum giant Alcoa (AA). While strong momentum across automotive and aerospace markets remains encouraging, the company is still exposed to a weak aluminum price environment.

Alcoa raked in a loss in first-quarter 2014, reported on Apr 8, on sizable restructuring charges. But its adjusted earnings topped the Zacks Consensus Estimate. Sales fell on lower aluminum pricing and missed expectations. The company continues to expect aluminum demand to rise 7% this year.

Alcoa is seeing strength in automotive and aerospace markets. The automotive industry is expected to offer significant opportunity this year and beyond. Alcoa sees meaningful growth of aluminum use in the auto sector in 2014 as automakers increasingly look for the metal as a cost-effective mean to boost performance, safety, durability and fuel efficiency of their vehicles.

Alcoa, which makes aircraft fasteners, is also witnessing healthy airline fundamentals. It has raised its growth expectations for the aerospace market to 8%-9% from 7%-8% for 2014 factoring in strong demand for both large commercial aircraft and regional jets and sustained growth in the business jet market.

Moreover, Alcoa remains committed to move down its cost curves in its upstream businesses and drive profitability in its downstream business. The company has taken up a number of restructuring measures (including closure of smelters) and is aggressively pursuing cost-cutting actions. Alcoa, during the first quarter, announced three smelting capacity reductions.

However, Alcoa continues to grapple with weak aluminum pricing. Realized aluminum prices fell 8% in the first quarter, dragging down the company's sales in the process. Aluminum prices remain under pressure given the oversupply of the metal in the market.

In addition, Alcoa is still witnessing softness across building and construction and commercial transportation markets in Europe. It expects weakness in non-residential building and construction market to persist in Europe and expects a 2%-3% decline this year. The company also expects weak demand in the industrial gas turbine market.

Key Picks from the Sector

Other mining companies worth considering include General Moly, Inc. (GMO), Golden Minerals Company (AUMN) and Platinum Group Metals Ltd. (PLG). While General Moly retains a Zacks Rank #1 (Strong Buy), both Golden Minerals and Platinum Group sport a Zacks Rank #2 (Buy).