Why Alcoa (NYSE :AA) may reach to $ 14.50?

·     

·      Alcoa is coming up with one of the strongest years of financial performance in memory. Revenue reached a record $30.7 billion and EPS was reported at $2.95. Now, just as Alcoa appears to be returning to form, recently reporting what were undoubtedly the strongest yearly financial results at the company since 2007/2008 that generated earnings of $.92 per share on $23.9 billion in revenue, some are beginning to call a top. Some of the bearish these include an oversupply of aluminum or a slowdown in aluminum demand. Both of which are health concerns. However, investors must realize that this Alcoa is not the company that saw its shares decline some 80 plus percent in 2008.

·      For the last 5+ years, shares of Alcoa have, for the most part, tracked the LME aluminum spot price.

·      A change in internal investment strategy could be freeing the company from the clutches of the commodity.

·      After three acquisitions, Alcoa can produce almost every part required in a metallic airplane.

·      The recent acquisitions have also beefed up Alcoa's exposure to titanium at a crucial time.

·      When companies produce a commodity and the price of that commodity is high, revenue is equally high, margins expand and earnings rise. On the other hand, when the value of the underlying commodity falls, revenue dips, but costs remain the same. Therefore, margins contract (maybe even turn negative) and earnings decline sharply. In each case, the stock trades accordingly, as can be seen in the 5-year chart of the aluminum producer, Alcoa (NYSE:AA), presented below.

·      New Alcoa has targeted its investing activities on the downstream, value-added side of the business, while divesting high cost capacity to lower its positions on both the alumina and aluminum cost curves.

·      Above is a graphical representation of Alcoa's positioning on the aluminum cost curve. As you can see, the company has successfully reduced its positioning by 8% points over the last four years through the closing of high cost capacity, something that was not occurring at the peak in 2008. The same holds true for the company's position on the alumina cost curve shown below. The change here has been a bit more modest, declining only 5% pts over the four-year span. However, in both cases, Alcoa is improving its positioning, thus protecting itself from the volatile swings that can be seen in the commodity market by shutting down high cost capacity. Since the peak in 2007, the company has closed, curtailed, or sold roughly 31% of its highest cost smelting capacity. And Alcoa appears poised to expand upon these efforts in 2015, announcing the review of 500 metric tons (14%) of smelting capacity and 2.8 million metric tons (16%) of refining capacity for curtailment or divestiture.

·      Moving to the perhaps more exciting side of the portfolio transformation, Alcoa has begun to differentiate its products for more sustainable end markets such as aerospace and automotive. In aerospace, the strides made have been phenomenal, adding Firth Rixon, Tital, and RTI International to its portfolio in the past 6 months or so. Each of which, has allowed Alcoa to expand its presence in the aircraft. Just look at the graphic below.

·      We are expecting Alcoa is good to buy around $ 12.6 for $ 14.50 by end of 3^rd quarter.

         

.