Valuation of Alcoa Inc Advanced Corporate Finance Teodora
- Slides: 28
Valuation of Alcoa Inc. Advanced Corporate Finance Teodora Spasova 04/25/06
Outline l Industry Profile l Company Profile l Business Environment l Strategic Plans l Financial Performance l Valuation
Industry Profile A procyclical industry- follows the overall performance of the economy l Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily based on market supply and demand l Serves a number of growing markets-alumina, aluminum, aerospace, packaging and consumer, industrial products, automotive, building and construction, commercial transportation l Very high barriers to entry l
Industry Performance l Aluminum production depends on factors like energy and raw material costs, demand, price of aluminum/ alumina, seasonal fluctuations in markets, fluctuation in foreign currency exchange rates, R&D, technology, and the overall state of the economy l Industry Performance Source: Smart. Money. com
Company Profile l Sector: Basic Materials l Industry: Aluminum (6 segments): – Alumina-the mining of bauxite – Primary Metals-aluminum ingot – Flat Rolled Products – Engineered Products – Extruded and End Products – Packaging and Consumer l Full time employees: 129, 000 in 42 countries
Key Statistics l Market Cap- 30. 79 B l Total Revenue-26. 2 B l Total Assets-33, 696, 000 Source: Yahoo!Finance l Quote: AA l Index membership: DJIA, DJComposite, S&P 500, S&P 1500 Super. Comp l Exchange: NYSE
Company Profile – Cont. Trademarks (Packaging & Consumer): Alcoa® wheels, Reynolds Wrap®, Baco® household wrap, Howmet® metal, Huck® fasteners l During 2005, it acquired remaining 30% minority interest in Alcoa Closure Systems International (Tianjin) Co and remaining 40% interest in the Alcoa (Shanghai) Aluminum Producs 2005 l During 2005 it discontinued the business of Southern Graphic Systems Inc l
Business Environment Alcoa is the world’s leading producer of aluminum, fabricated aluminum, and alumina l The company is active in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling l Aluminum and alumina represent app. ¾ of Alcoa’s revenues l The price of aluminum influences the operating results of Alcoa l
Business Environment-Cont. A global company with largest market in North America (61% of 2005 Revenues), followed by Europe (23%) l Investments in China, Russia, Brazil, Australia opportunities for growth l Factors that affect its revenue from these countries include: governmental policies and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates – hedging through int. rate swaps and currency exchange contracts l
Some industry trends in 2005 l Continued strong demand for aluminum l Pressure on prices driven by tight aluminum markets l High material and energy costs
Financial Performance 2005 l l l Revenue growth of $2, 923, or 13%over 2004 Income from continuing operations of $1. 23 B Debt-capital ratio of 30. 8%, within the target range of 25%-35% Mitigation of cost inflation through structural cost savings Continued execution of an aggressive growth strategy
Portfolio Management Highlights l Divested/Restructured Smelting HAW Eastalco l Elkem Equity l Aluminum Downstream Automotive Casting Cast Auto Wheels l l l Acquired/Invested Refining Suriname Pinjarra l Energy Three Oaks Mine, Friendsville mine U. S. hydro, Latin America hydro Warrick power plant Non-aluminum Integris Southern Graphics AFL-Telecommunications l Smelting Iceland, Alumar stubline Ghana restart European modernization Other restructuring 7% headcount reduction l Rolling Russia, Bohai. Shanghai, Aerospace
Financial Performance- Cont. l - Positive factors Higher realized prices for aluminum and alumina Higher demand in downstream markets The sale of Alcoa’s stake in Elkem ASA Income tax benefit resulting from tax reviews and audits Sale of railroad assets l - - Challenges Higher than expected costs for energy and raw materials Restructuring costs driven by a new global business structure Integration of the acquired Russian facilities Gulf Coast hurricanes impact Business interruptions due to unplanned outages and labor strikes in Europe
Industry Comparison Source: The WSJ Five-year price performance of stock, its DJ Industry group and the DJ U. S. Total Market Index, reindexed to zero.
Industry Comparison-Cont. Past Performance 3 Months 6 Months Year-to-Date 12 Months 2 Years 5 Years Alcoa Inc Aluminum 20. 73% 48. 84% 17. 59% 20. 31% 5. 11% -13. 83% 20. 73% 48. 84% 17. 59% 20. 31% 5. 68% -13. 38% DJ U. S. Total Market Index 4. 46% 12. 84% 5. 94% 17. 79% 20. 94% 11. 66% Performance data reflects previous day's closing price, updated by 12 a. m. ET. Data is based on price appreciation only. Calculations do not include returns from dividend reinvestment. Historical data is displayed for the selected stock and its specified DJ U. S. Industry Index. The DJ U. S. Total Market Index measures the performance of the broad U. S. equity market and includes over 1800 company stocks.
Alcoa Stock Performance vs. S&P 500 Source: Yahoo! Finance
Outlook for 1 Q 2006 l l l Positives Continued strong demand for aluminum Aluminum prices strengthened for 15 yrs highs Strong aerospace markets Continued operating development Continued progress on growth projects: Russia, China, and Upstream Negatives l Seasonal declines in consumer products, building and construction
Strategic Goals and Priorities 2006 l Managerial Excellence - Focus on volume and cost savings via the Alcoa Business System (ABS), centralized purchasing, consolidation, LCC - Increase overhead productivity while managing overhead expenses through ABS and low-cost country sourcing (by 2009, more than 40% of the production will originate from low-cost countries) - Focus on product mix, pricing and new product application - Successfully manage capital expenditures and projects
Strategic goals-Cont. Portfolio Management l - Monitor the progress of underperforming assets and make appropriate adjustments to strengthen the portfolio Profitable Growth l - Capitalize on strong markets where the company is well located Use technology as an advantage Continue to integrate investments in Russia and China Continue to focus on value-creating organic growth projects
Major Markets Trends Aluminum and alumina – The world’s largest producer of alumina – Alumina production in ’ 05 rose 2% to 14. 6 M mtpy – In ’ 05 54% of Alcoa’s refinery production was supplied to outside customers – Alcoa has app. 9% of the worldwide aluminum capacity
Major Market Trends-Cont. Industrial Products Packaging and Consumer – Alcoa segments: Flat-Rolled Products, Packaging and Consumer – The Reynolds Wrap® brand placed #1 in the U. S. Harris Equi. Trend® as the greatest brand equity for the second straight year – Alcoa segments: Flat. Rolled products, Engineered Solutions, Extruded and End Products – Heavy-duty gas turbine build rates start to increase due to increased power demand in the Asian and Middle Eastern markets – Growth opportunities for the supply of spare parts
Valuation- DCF Model Assumptions: CAPM l Risk-free rate: 4. 86% Market Risk premium: 6. 40% Beta: 1. 91 Tax Rate: 22. 8% WACC: 15. 18% l Projection 5 -year non-constant growth: 10% Constant growth: 3%
Valuation-Cont. l Results: Price per share: $34. 80 Current Price (as of 04/21/06): $35. 39 l Recommendation: hold
Comparative Analysis l Competitors l Strengths / comparative advantage l Weaknesses
Main Competitors Alcoa Inc Alcan Inc Century Aluminum Company Aluminum Corporation of China Market Cap $30. 79 B $19. 47 B $1. 61 B $11. 41 B Current Price $35. 39 $52. 09 $49. 93 $103. 22 5 -year CAGR Revenues 2. 7% 10. 40% 12. 08% N/A P/E 19. 60 160. 20 n/a 14. 24 PEG 0. 91 1. 29 0. 93 0. 63 Price/Sales 1. 06 0. 96 1. 37 n/a Current Ratio 1. 18 1. 10 0. 63 n/a Quick Ratio 0. 63 0. 39 n/a 0. 71
Competitive Advantage l l l l Most aggressive growth strategy in the industry (builds on high competency and technology) In alumina – low-cost brownfield projects (refining projects will increase the existing base with 40%, and will lower the refining cost by 15%) In aluminum – global system of smelters; strategic raw materials, construction costs, best-in-class manufacturing Investments in Russia and China- opportunities to capture growth in Eastern Europe and Asia Large project management capabilities Experience in dealing with governments around the world The Alcoa brand
Weaknesses Not sufficient use of underperforming assets l Need better control of cost savings and increase of productivity l Better focus on product mix, pricing and new product application l
And Finally… Thank you!
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