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Engineering Alcoa’s Success In 2015

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Alcoa’s engineered products and services

In the previous part of this series, we discovered that the engineered products and services segment is Alcoa’s (AA) most profitable. In this part, we’ll look at two factors that will drive this part of the business in 2015.

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Non-residential construction

Alcoa earns almost $1 billion in revenues from the non-residential construction industry. Non-residential construction is picking up, at least in US markets. The chart above shows non-residential construction spending in the US. As you can see, it has been gradually rising. And today’s emphasis on eco-friendly, green buildings has led to the higher use of aluminum in these construction projects.

The non-residential construction industry is expected to maintain its momentum in 2015. This will support Alcoa’s engineered products and services segment. Companies such as Century Aluminum (CENX) will also benefit from this trend. Currently Century and Reliance Steel & Aluminum (RS) are the top holdings of the SPDR S&P Metals and Mining ETF (XME).

Firth Rixson

Another key driver for Alcoa (AA) in 2015 will be the integration of Firth Rixson, a leading jet engine component manufacturer that Alcoa acquired for $2.85 billion.

Alcoa completed the acquisition in November, and the it expects Firth Rixson to add $1.6 billion of revenues and $350 million of EBITDA by 2016.

The aerospace industry itself is growing at a healthy pace. Constellium (CSTM), however, recently indicated that a slow-down at one of its top customers in the aerospace sector contributed to lower profits for the company.

Alcoa, meanwhile, is quite bullish about demand from the aerospace industry. Still, Alcoa may face certain headwinds in 2015. We’ll look at what these might be, next.

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