This Part Of Alcoa's Business Is Flying Under The Radar

• Alcoa Inc AA shares have been treading a downward path since February 5, when they crossed the $17 mark.
• Morgan Stanley’s Paretosh Misra maintained an Overweight rating on the company, with a price target of $14.
• Misra believes Aloca’s shares offer an attractive risk-reward, with the company’s downstream portfolio likely being underappreciated.

Analyst Paretosh Misra believes that Alcoa’s downstream portfolio, comprising of Engineered Products Solutions [EPS] and Global Rolled Products [GRP], is underappreciated and expects Alcoa to have free cash flows in 2016, with supply response expected to pick up in the next six months.

Recent transactions in the aerospace supplier industry have highlighted the need to take a fresh look at Alcoa’s downstream portfolio, Misra said. He added, “Aerospace business represents ~55% of the total EV of downstream. We expect AA to generate ~$6 bn in revenues (~25% of the total) and $1.25 bn in EBITDA from the aerospace market in 2016.”

Misra expects Alcoa’s aerospace EBITDA to rise at a 9 percent CAGR in 2015-2019. The growth in the company’s titanium and Firth Rixson businesses should further boost these metrics. Although the company’s aluminum business remains challenging, “we see limited downside,” the Morgan Stanley report stated.

The company’s reorganization is expected to create an even better PCP-comp. Alcoa plans to split the EPS segment into two parts from 3Q onwards. “The “new" EPS segments should have $6-$7 bn in 2016e revenues at margins closer to PCP, which we think should support the stock's re-rating,” Misra added.