Wednesday, September 21, 2011

Alcoa Slides

Over the past two months, Alcoa Inc. (AA) has significantly underperformed expectations and is currently trading well below our stop-loss of $12.50. We believe this poor performance can be attributed to lack of growth in the global economy and further concerns about the future of where the economy is heading. Although AA has struggled, we believe the company has taken initiatives to continue to maintain their earnings through 4Q11 and has positioned themselves well to take advantage of economic growth in 2012 and 2013.

Most recently, Alcoa has released plans to put $300M into their Iowa flat rolled aluminum factory in anticipation of further demand from the automotive industry. Major automotive manufacturers as well as airline manufacturers are making the move to aluminum from steel, as they are looking for a more cost-effective solution to steel. Aluminum offers a light-weight alternative that will provide for greater fuel efficiency without sacrificing strength. As of now, automobiles are made with 300 lbs. of aluminum on average. Some experts are anticipating that number will climb to 500 lbs. in the next 10 years. This increase in demand will be a strong driver for Alcoa's top line growth. As well as expanding their Iowa factory, AA reached an agreement with China Power Investment Corp. to develop high end engineered aluminum products to satisfy demand within the automotive, aerospace, packaging, and consumer electronics divisions.

Alcoa also announced the reorganization of their midstream Global Rolled Products business to tap into growth in emerging markets. The shift will allow the company to focus on five global markets: aerospace, ground transportation,packaging, consumer electronics, and defense. As opposed to their prior approach which focused on regions, this approach will allow them to capitalize on growth ahead in a specific end market.

We currently feel that the long-term outlook for Alcoa outweighs the short-term loss we are incurring in our portfolio. Alcoa will release earnings on 10/12/2011. We will continue to monitor AA closely leading up to earnings to ensure that it is in the best interest of our portfolio to maintain our position.

-Jeremy Pellizzari

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