Alcoa (AA) Continues Portfolio Shift with Tital Buyout - Analyst Blog

Aluminum giant Alcoa (AA) has made another major push into the fast-growing aerospace market as it has agreed to buy Germany-based Tital – a leading provider of titanium and aluminum structural castings for aircraft engines and airframes. Financial terms of the deal were not divulged.

The move is in sync with Alcoa's goal to profitably grow its aerospace franchise and is part of the company's portfolio transformation strategy as it gradually shifts its focus on lucrative aerospace and automotive markets.

Alcoa, which was ousted from the Dow Jones Industrial Average last year partly due to its tepid stock performance, is increasingly focused on broadening its foothold in the aerospace market as it looks for expansion opportunities beyond its legacy primary aluminum business and diversify into other materials such as those (nickel and titanium-based) used to make aircraft parts. The company remains pressed by weak aluminum pricing given the oversupply of the metal in the market.

Tital had revenues of $96 million last year, over half of which were derived from titanium products. The entity's sales from titanium has been forecast to jump 70% over the next five years as jet engines makers increasingly look to titanium solutions for engine structural components. Titanium – which can endure extreme high heat and pressure – is a lighter substitute to steel, offering enhanced energy efficiency and better performance.

The Tital acquisition is expected reinforce Alcoa's position to leverage strong growth in the commercial aerospace sector and capture rising demand for advanced jet engine components made of titanium. Alcoa envisions the commercial jet sector to grow at a compounded annual rate of 7% through 2019. Roughly 70% of Tital's sales are expected to come from commercial aerospace in 2019.

Tital's titanium and aluminum structural components are used on existing and next-generation jet engines and airframes. The acquisition will boost Alcoa's aluminum casting capacity and help it establish titanium casting capabilities in Europe. The company will capitalize on Tital's strong associations with European engine and aircraft makers including Airbus to enhance its customer relationships in the region.

The deal has been cleared by the boards of both Alcoa and Tital. The transaction is subject to regulatory approvals and other closing conditions and is expected to consummate in first-quarter 2015.

Alcoa's shares were up as much as 2.8% in the trading session yesterday. The stock has delivered a healthy year-to-date return of around 40%.  

Alcoa is aggressively pursuing its aerospace expansion strategy. The company, last month, closed its takeover of U.K.-based leading jet engine components maker – Firth Rixson – from private equity firm Oak Hill Capital Partners in a cash and stock deal worth $2.85 billion. The acquisition has allowed Alcoa to penetrate into a highly specialized segment of jet engine forgings.

Moreover, the $1.1 billion agreement to supply key parts (including forgings) to Pratt & Whitney – a unit of United Technologies Corp. (UTX) – also underscores Alcoa's continued efforts to strengthen its aerospace business.

Alcoa also landed a long-term deal with Boeing (BA) in Sep 2014 to supply aluminum sheet and plate products. The contract, which is worth more than $1 billion, is the largest ever between the two companies.

Alcoa holds leading market positions in aerospace forgings, extrusions, jet engine airfoils and fastening systems made by its downstream business, and aerospace sheet and plate made by its midstream business. The company's aerospace business was the biggest contributor to its value-add businesses last year, accounting for 57% of overall sales and 80% of segment profits.

Alcoa, in Oct 2014, backed its global aerospace growth expectations of 8%-9% for 2014 factoring in strong demand for both large commercial aircraft and regional jets.

Alcoa is a Zacks Rank #3 (Hold).

A better-ranked stock in the mining space is Dominion Diamond Corp. (DDC), carrying a Zacks Rank #1 (Strong Buy).