Cleveland: Why We're Initiating On Alcoa

Cleveland Research initiated coverage on Alcoa Inc AA Wednesday with a Neutral rating.

Analysts Christopher D. Olin and Casey McDonald had a “favorable long-term view of the company, mitigated by potential FY15 aluminum-related headwinds.”

Olin was not confident, however, that current estimates had “fully discounted the downside risks associated with weaker aluminum price momentum” as well as excess global production in the face of slowing demand.

2015 EPS could come in below $1.00 if premiums do not stabilize in the LME and regional markets, according to Olin. The consensus estimate for 2015 EPS was $1.05 while Olin currently expected $1.02.

The analysts pointed out that the global aluminum industry appeared to be entering a near-term net-oversupplied position and a “2-3 point sequential decline in the overall global demand growth
environment.”

As for Alcoa’s response to the industry, the company was “diversifying away from upstream aluminum production” and planned to “shutter the inefficient or high-cost refineries and smelters.”

Olin also noted that the company had “refocused on capital reallocation into downstream revenue sources, with a focus on the aerospace.”

Over the medium term, the automotive industry represented a “game-changer” for the aluminum industry, Olin wrote. “Notable market share gains on future light vehicle platforms & aggressive emission regulations should promote increased usage of the lightweight materials on future vehicle designs.”

The analysts expected 300 percent volume upside for the automotive industry over the next 5 years as it becomes a 1 million MT industry.

“Ultimately, we prefer to wait for a lower share price entry point and/or positive signals from our various surveys,” Olin concluded.

Alcoa Inc recently traded at $13.53, up 0.07 percent.