Alcoa (NYSE:AA) believes that positive long term fundamentals are still intact for the aluminum industry, despite recent concerns by investors regarding a slowing of global economic growth. This macro overview, and additional details on the company's strategy to take advantage of these fundamentals, was provided at an investor day recently held for the institutional investment community.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Demand Growth
Alcoa expects demand for aluminum to grow at a rate greater than the historical trend lines, for the balance of the current decade. This growth will be led by China and the emerging economies of the world, as a large middle class develops in these countries over the next generation.

The world consumed 44 million tons of aluminum in 2011, up from 39 million tons in 2010. This demand will grow at a 6.5% compound annual growth rate (CAGR) and reach 73 million tons by 2020. (For more on CAGR, see Compound Annual Growth Rate: What You Should Know.)

This optimistic view of growth by Alcoa implies that demand for aluminum will grow at a 1.6 multiple of GDP growth from 2010 to 2020. During the 1980 to 2000 time period, demand for aluminum grew at a rate only 80% of GDP growth.

Other factors supporting higher annual rates of aluminum demand growth, include a rising world population and the trend towards urbanization. Also, greater concern for the environment, as reflected in increased regulation, encourages the substitution of light weight aluminum materials, in place of traditional materials.

Company Strategy
Alcoa has been working to reduce costs and move down the cost curve, on the refining and smelting side of the business. The company is looking to move refining costs from the thirtieth percentile in 2010, to the twenty third percentile by 2015. On the smelting side, Alcoa is attempting to get to the forty first percentile, down from the fiftieth percentile in 2010.

Alcoa has also set a goal of adding $4.1 billion in revenue to the company's base over the 2010 to 2013 time frame, along with an increase in EBITDA margins, as well. The Global Rolled Products segment is expected to add $2.6 billion over that time frame, as the company sees the most growth in the Aerospace and Automotive businesses. The Engineered Products & Solutions segment will add $1.5 billion over three years, with growth coming from market share gains and the introduction of new products.

Competitors
Alcoa competes globally against a number of domestic and international companies. Kaiser Aluminum (Nasdaq:KALU) serves the defense, aerospace and automotive industries and reported $1.2 billion in sales in the twelve months ending June 30, 2011. The company has more than a dozen manufacturing facilities spread across the United States and Canada.

Century Aluminum (Nasdaq:CENX) is headquartered in California and has facilities in the United States and Iceland. The company reported a GAAP loss of $6.6 million or 7 cents per diluted share, in the third quarter of 2011. This loss was caused mainly by an inventory adjustment recorded by the company during the quarter. (For more on GAAP, see What Are Some Of The Key Differences Between IFRS And U.S. GAAP?)

One company that is not that enamored with the aluminum business, is Rio Tinto PLC (NYSE:RIO), which recently announced that it would sell more than a dozen separate aluminum related assets. The company will focus its efforts in what it considers to be tier one assets in the business.

The Bottom Line
Alcoa is bullish on aluminum, as one might expect given the company's position in the industry. Howver, investors have been burned before, when relying on overly optimistic long-term growth rates, to justify a stock investment; caution should be exercised in this case, as well.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  5. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  6. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center