In the last part of the series, we analyzed how Alcoa (AA) is strategically moving towards a greater mix of value-added products. This is part of Alcoa’s broader transformation exercise. In this part of the series, we’ll analyze the transformation. We’ll discuss how it will impact Alcoa’s shareholders.
How Alcoa’s transformation impacts its investors
As part of its transformation, Alcoa has been developing innovative products for its customers. It has been enhancing its product offerings through acquisitions. It has also been rationalizing its primary products division. The primary products division produces raw aluminum. It has shut down some plants that aren’t financially viable. The chart above shows Alcoa’s strategic priorities to achieve shareholder value.
Some of the key actions of this transformation exercise include:
- Disciplined cost focus – Alcoa achieved productivity improvements of ~$ 1.7 billion in 2009–2013. In the first half of 2014, the cost improvements totaled $156 million
- Increasing dominant position in the aerospace industry – With the Firth Rixson acquisition, Alcoa strengthened its dominant position in the aerospace industry. Through its research and development centers, it develops customized and innovative products for its customers in the aerospace industry.
- Increasing capacity to produce products for the automotive industry – As discussed previously, this will help Alcoa increase its revenues from automotive companies
- Rationalizing upstream operations – Alcoa has rationalized its upstream operations. It has reduced its smelting capacities by ~30% since 2007. This has been a phenomenon with all major aluminum producers. The excess global capacity has been one of the key reasons for this.
After looking at the factors that will drive Alcoa’s (AA) future earnings, we’ll look at the possible risks that Alcoa investors face. Investors can also gain access to the aluminum industry through Constellium (CSTM), Kaiser Aluminum (KALU), Century Aluminum (CENX), and the SPDR S&P Metals and Mining ETF (XME).
Visit the Market Realist Aluminum page to learn more.