Stock Analysis Name: Alcoa Inc. Ticker: AA Sector/Industry: Materials/Metals & Mining Table of Contents One Pager ...................................................................................................................................................................................... 2 Income Statement ...................................................................................................................................................................... 4 Industry Analysis ....................................................................................................................................................................... 5 Company Analysis .................................................................................................................................................................. 11 Strategy .................................................................................................................................................................................. 11 Management ......................................................................................................................................................................... 13 Peer Comparison ..................................................................................................................................................... 14 Analysis Discussion ................................................................................................................................................ 16 Financials ............................................................................................................................................................................... 18 Appendices ................................................................................................................................................................................ 21 Safiya Walker Summer 2014 Herndon Capital Management
Transcript
Stock Analysis Name: Alcoa Inc. Ticker: AA Sector/Industry: Materials/Metals & Mining
Table of Contents One Pager ...................................................................................................................................................................................... 2
Income Statement ...................................................................................................................................................................... 4
Industry Analysis ....................................................................................................................................................................... 5
Company Analysis .................................................................................................................................................................. 11
One Pager Company Description Founded in 1888, Alcoa Inc. is a prominent worldwide company in the market of lightweight metals engineering and manufacturing. Alcoa’s varied products, aluminum, titanium and nickel, are used globally in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. In addition, the Company is first-‐rate in the production and management of primary aluminum, fabricated aluminum and alumina combined. It is the world’s third largest producer of aluminum. Aluminum and alumina (synthetically produced aluminum oxide, used as a starting material for the smelting of aluminum metal) combined to generate 80% of Alcoa’s revenue while the United States and Europe represented 51% and 26% of Alcoa’s sales in 2013. The Company is based in Pittsburgh, Pennsylvania with corporate headquarters in New York City. The Company operates in 30 countries and has four worldwide reportable segments: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. Historical Performance Current 5Yr Average 5Yr Median 5Yr Min 5Yr Max P/E 931.34 111.26 27.27 8.91 939.55 P/B 1.49 0.91 0.85 0.61 1.53 WACC 8.22 9.43 8.53 7.31 11.76 ROE -‐0.08 0.82 0.61 -‐7.34 7.69 ROA -‐6.90 -‐0.89 0.26 -‐6.9 2.72 ROIC/WACC 0.36 0.25 0.35 -‐0.45 0.82 P/CF 16.78 7.64 6.21 3.79 20.44 CFO (in millions) 518.00 440.20 440.50 -‐551.00 1370.00 Peer Performance Screen
Investment Opinion Based on my knowledge of the company and its industry, I recommend buying Alcoa Inc. The aluminum market has experienced a period of growing supply, decreased demand and falling prices. As a result, the Company has permanently shut down a number of its highest-‐cost plants and continues to seek opportunities for low-‐cost production. The Company is focused on investing now for future growth. Initiatives include investing around $600 million at domestic plants in order to account for projected sheet aluminum demand from the automotive industry. Automakers are using aluminum instead of steel in order to create lighter-‐weight vehicles that meet coming fuel economy standards. Alcoa’s current metrics are not strong. However, the Company is taking the steps necessary to be successful in the long-‐term. It is a company to invest in for the totality of its cycle. Risks
Ø The market for aluminum is highly cyclical and reflects global economic conditions Ø Increased energy costs and/or interruption of energy supplies pose a significant risk Ø Joint ventures and strategic alliances may not be successful Ø The automotive industry’s demand for aluminum may increase at a slower pace than expected
Company NameMkt Cap
(millions) % Chg 1D % Chg 3M % Chg YTD Est. PE WACC ROE ROA EV/
About Aluminum Production Process Aluminum (Al) is formed through two processes: the Bayer Process (extraction of alumina (Al2O3) from bauxite), and the Hall-‐Héroult electrochemical smelting process, (the refinement of alumina into aluminum by electrolysis). Two to three tons of bauxite is required to produce one ton of alumina and two tons of alumina are required to produce one ton of aluminum metal (see page 21, Appendix A for Aluminum Production Process in diagram form). Primary aluminum production facilities are located all over the world, often in areas where there are abundant supplies of inexpensive energy, such as hydro-‐electric power. Bauxite Interests Bauxite, an aluminum ore, is a clay-‐like soil type found in a belt around the equator. It is mined from a few meters below the ground and the reserves are sufficient to meet the worldwide demand for aluminum for many centuries. For purposes of evaluating the amount of bauxite that will be available to supply as feedstock to its refineries, the Company considers both estimates of bauxite resources as well as calculated bauxite reserves. Alcoa obtains bauxite from its own resources and from those belonging to the Alcoa World Alumina Chemicals (AWAC) enterprise, located in Australia, Brazil, Jamaica, and Suriname, as well as pursuant to both long-‐term and short-‐term contracts and leases (see page 22 in Appendix B for a Complete Table of Bauxite Interests). During 2013, Alcoa consumed 41 million metric tons (mt) from AWAC and its own resources and 7 million mt from entities in which the Company has an equity interest. Tons of bauxite is reported as bone dry metric tons (bdmt). The Company has access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years from today.
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Income Statement
Key Drivers of Revenue and Profitability For any good, revenue is calculated as the product of price and quantity. In the market for aluminum, the key drivers of revenue are the ability to sell as much aluminum as possible and do so at the highest price. Quantity of goods sold is determined by the global demand and supply of the market. Currently, the demand for aluminum has decreased as Chinese industrial growth has waned. Increased use of aluminum in the automotive industry has begun to bolster demand, but growth remains negative. Comparatively, supply has increased and continues to rise amid plant shutdowns, primarily due to Chinese overproduction, resulting in a surplus. This surplus has driven down the price of aluminum, leading the world’s largest aluminum producers to conduct the aforementioned shutdowns. The decreased price of the good has made aluminum production less profitable. Aluminum is a commodity good meaning it is supplied without qualitative differentiation across the market. Therefore, the aluminum that will be in highest demand is the cheapest brand, and sets the world price. As a result, Alcoa is a price taker. Since the Company neither has control over the price nor the quantity sold, the only way to increase profitability and to differentiate the business is to have a cost competitive advantage. Key profitability drivers include: streamlined processes, efficient delivery, and cheap energy. The ability to produce aluminum at a lower price due to a geographic comparative advantage, access to low-‐cost energy (such as in Saudi Arabia), or innovative methods leads to overall greater profitability. Risk Discussion As with any investment there are risks to be calculated. The market for aluminum is highly cyclical and reflects global economic conditions. In an effort to remain competitive in a market of falling aluminum prices and slowing Chinese industrial demand, Alcoa focused on shutting down plants or curtailing production of various lines that had a high-‐cost smelting capacity. High costs are often attributed to energy costs. Energy accounts for approximately 25% and 26%, of Alcoa’s total alumina refining production costs and primary aluminum production costs, respectively. Increased energy costs and/or interruption of energy supplies pose a significant risk. As a result, the Company seeks opportunities for greater efficiency and lower cost production. However, joint ventures and other strategic alliances may not be successful. Within its pre-‐established joint venture with Saudi Arabian Mining Company (Ma’aden), Alcoa has begun constructing the world’s lowest-‐cost smelter in Saudi Arabia. The smelter will generate electricity
from the country’s cheap oil reserves. Further developments include integrating three Alcoa businesses into the joint venture company, Alcoa CPI Aluminum Investment Co, Ltd., a collaboration between China Power Investment Corporation (CPI) and Alcoa. There is rising demand for aluminum auto sheet from the automotive industry. In order to meet increased demand and future revenue opportunities Alcoa has invested in a $300 million expansion of its Davenport Works plant in Iowa. Furthermore in August 2013, the Company began its $275 million expansion of its Tennessee operations. The expansion will convert high-‐strength aluminum automotive sheet capacity from the plant’s existing can sheet capacity. Alcoa is hopeful that the automotive industry’s demand for aluminum will remain or increase, although both are finite.
Industry Analysis Industry Assessment Alcoa is a global lightweight metal technology, engineering and manufacturing company and the world’s third largest producer of aluminum. The Company also produces non-‐aluminum products including precision castings and aerospace and industrial fasteners. Alcoa’s products are used in various industries: aircraft, automobiles, commercial transportation, building and construction, oil and gas, defense and packaging. The aluminum industry is cyclical, with the ebbs and flows of the market price dictated by global economic activity. Price and quantity sold are directly determined by supply and demand. According to the International Aluminum Institute, approximately 50,602 thousand metric tons of aluminum was produced in 2013. Chinese producers led the charge by producing 21,936 thousand metric tons, 43% of the global annual production. North American producers were second, producing just over 9%. Since aluminum is a commodity there is minimum product differentiation in the industry. However, competition between leading producers, such as the United RUSAL group, Chinalco, Alcoa, Rio Tinto, Hydro Norsk etc., is generated by geographic comparative advantage, possession of cheap energy and production capacity. Global aluminum consumption in 2013 was led by China, followed by Asia (China excluded), Europe (Russia excluded), and North America according to the European Aluminum Association. Historical Price Performance
Source: Bloomberg
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Price performance for Alcoa has been fluctuating minimally with only two major spikes in the past five years. The first was a resurgence post-‐financial crisis and the second was due to positive global growth expectations then decelerating Chinese economic growth. Since mid-‐2011 the price has remained relatively stable until the recent upsurge in price that is due to increased confidence that aluminum global demand is growing and the strong 2014 Q2 earnings report that was released in early July. The earnings report highlights included a 7 percent revenue increase to $5.8 billion and a net income of $138 million, or $0.12 per share. All four Reportable Segments performed well. Engineered Products and Solutions (EPS), the downstream business, reported its highest after-‐tax-‐operating income in history of $204 million with a record adjusted EBITDA margin of 23.1 percent. Global Rolled Products (GRP) continued to receive increased demand for automotive sheet. Alumina and Primary Metals together comprise the upstream business which had its 11th consecutive quarter of improved performance. In addition, Alcoa reaffirmed their global aluminum demand growth forecast of 7 percent in 2014, while the global aluminum deficit is increasing, and the alumina surplus is shrinking. Historical Fundamental Performance (in millions of USD, except per share)
Key Economic Indicators Key economic indicators for the aluminum industry are metrics that reflect the movement of the market or effect supply and demand such as global growth GDP, and the rate of Chinese manufacturing. The aluminum industry is cyclical thus metrics that demonstrate how the economy is faring are convenient indicators of how the industry is performing.
World GDP YoY% (5YR-‐Current) Source: Bloomberg World GDP is an aggregate measure of total economic production for the world. It is a metric that represents the market value of all goods and services produced by the economy during a certain period of time.
China Manufacturing PMI SA (5YR-‐Current) Source: Bloomberg Although the graphs do not appear at first glance to resemble each other, they do give us a picture of how the economy was doing in the past 5 years. The China Manufacturing PMI SA has trended down for the past five years as has World GDP YoY. From the China Manufacturing PMI SA we can garner that Chinese manufacturing growth was slowing down. This is important to note for the
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aluminum industry. Industry and construction account for 46.8% of China’s $9.182 trillion nominal GDP. Major industries include mining and ore processing for various materials including aluminum. As Chinese construction growth slows, so does the demand for aluminum. However, the supply of aluminum produced by the Chinese market is not decreasing at the same rate, leading to the commodity surplus and the accompanied price dive of the past few years. Below is another graph, this one depicting the Chinese industrial production trend.
China Industrial Production Source: Bloomberg
Industry Outlook Supply/Demand Trends
Global Primary Aluminum Supply & Demand Source: Bloomberg Note: In this line graph, the orange dots and corresponding line represents the global supply trend for primary aluminum. The white dots and corresponding line represents the global demand trend for primary aluminum.
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The supply and demand trends experienced a shift during the financial crisis. Pre-‐crisis, demand was generally equal to supply or greater. However, during the crisis and subsequently, demand decreased and shifted down, while supply either remained where it had been pre-‐crisis or shifted up. This occurrence explains the drastic change in the price of aluminum and greatly affected the price of Alcoa’s stock. As the demand decreased and the supply did not, a surplus ensued. Below is a graph depicting the historical net surplus/-‐deficit of aluminum.
Primary Aluminum Net Surplus/-‐Deficit Source: Bloomberg Production and demand for aluminum today are broken down as follows.
Source: Bloomberg
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Source: Bloomberg Margin Trends Alcoa’s strategy to gain higher profit and operating margins is led by two efforts. One, to cut costs of production and two, expand their downstream business. Shutting down or curtailing operations at the most costly plants has accomplished cutting costs of production. It is believed that future productivity from these plants will offset the costs of closing down those operations. Cutting costs will increase operating income and create higher profit margins. Alcoa is also focused on expanding its downstream business. The business features more differentiated products with higher profit margins. Investing in downstream operations will either increase Alcoa’s operating income and/or increase their revenue, leading to a higher operating margin. Operating Margin (FY2008-‐FY2015E)
Source: Bloomberg
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Operating Trends Currently Alcoa is producing below total consolidated capacity. In its Primary Metals segment, as of December 31, 2013, Alcoa had approximately 655,000 metric tons per year (mtpy) of idle capacity against a total consolidated capacity of 4,037,000 mtpy. In other words, Alcoa was producing at about 83.78% of its possible output. In its Alumina segment the Company was producing at 93.29% of potential output, and had 1,216,000 mtpy of idle capacity against total consolidated capacity of 18,112,000 mtpy. External Forces External forces influencing the aluminum industry include the Environmental Protection Agency (EPA) regulations, the auto-‐material competition with steel and the public’s perception of aluminum. All of these forces are part of the automotive industry shift from steel to aluminum, which is playing an essential role in the future of the commodity.
Company Analysis Strategy
1. Operational Performance a. Firth Rixson acquisition
i. Addition to aerospace segment ii. doubles Alcoa engine content on key programs almost immediately iii. brings us $1.6 billion revenues and $350 million EBITDA in 2016 iv. helps continue construction of “lightweight, multi-‐materials powerhouse” v. technology is leading edge particularly the isothermal process, allows for
higher operating temperature in turbine b. 95% of growth spend ($114 million) was in mid & downstream operations c. Alcoa APP, Alcoa Power and Propulsion business
i. Investment casting business ii. Revenues are up for 2016, project $2.6 billion of revenue
d. Low Costs i. Power sales from curtailed Brazilian smelters were positive $40 million,
productivity gains offset cost increases ii. Point Henry closure in Australia will reduce production nearly 50,000
metric tons and cost an additional $7 million iii. Anticipate lower energy prices in Brazil reducing energy sales $10 million in
Q3, expect productivity gains to offset cost increases in Q3 iv. Record first-‐half production in low-‐cost Australian system, 1.7 million tons
of capacity curtailed v. Letter of intent for the sale of Jamalco interest vi. Constructing pipeline going to San Ciprian that will allow Alcoa to come
down $20 per metric ton on the cost curve, it will be completed by end of 2014
vii. Saudi Arabia development received first bauxite, and will ramp up in Q4 viii. Able to move down alumina business down from 30th percentile to 27th on
cost curve, believe it can be brought to 21st ix. Continuous improvement on productivity in smelting business, had to do
more restructuring (28% capacity closed or curtailed) since started out at 51st percentile on cost curve, productivity gains to continue
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2. Portfolio Transformation a. Firth Rixson acquisition, strengthened strong aerospace portfolio b. Accelerating transformation with two main themes:
i. Lightweight, multi-‐materials innovation and highly competitive commodities business
c. Lightweight Innovation i. Aluminum lithium, innovative solution for aerospace ii. Ultra ONE, project $1 billion revenue in wheel business, 40% lighter than
steel iii. Flite-‐Tite fastener, multi-‐material product: aluminum, aluminum lithium,
titanium, “lightning strike fastener”, guides lightning strike through wing of CFRP planes
iv. Alcoa 951, breakthrough durable bonding, key enabler for making AIVs happen
d. Aerospace, Automotive, Heavy Trucks i. Aerospace
§ Expect 8% to 9% growth § Large Commercial Aircraft segment growing 12.1%, strong
commercial jet order book § Strong fundamentals according to International Air Transport
Association IATA), expect 5.9% increase of passenger demand, 3.1% increase of cargo demand, airline profits up, and $18 billion for the industry
§ Jet Engine side order book is full, 23,000 engines are on firm order § $100 million investment announced to expand structural engine
component offering in Indiana § $25 million investment to continue enhancing jet engine blade
performance in Virginia ii. Automotive
§ AIVs, aluminum-‐intensive vehicles, better fuel efficiency and superior performance, meet Corporate Average Fuel Economy (CAFE) regulations, mid-‐sized sedan can be light weighted by 28%, improving fuel efficiency by 18%
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§ Project growth of 2% to 5% in North America § Sales are up relatively substantially, in June 1.4 million units, this is
up 1% YoY and 4% YTD § Already seeing strong demand, still pent-‐up demand which will be
evident in future § Inventory is down to 59 days, historic average is 60-‐65 days § May production is up 4% and YTD up 3% § On European side, believe we will see growth this year between 0%
and 4% § On China side, growth between 6% to 10%, sales on YTD basis are
up 9% so far iii. Heavy Duty Trucks
§ Growth projection increase to 10%-‐14% from 5%-‐9% § Orders are up 20% YoY, on a YTD basis even 28% § Order book stands at 119 trucks, historic average is 114 § Production forecast increase to 140,000 unites on YTD basis, up 15%
on YoY basis § In Europe, believe market will shrink between 1% and 5%, seeing
currently on a YoY basis 12% shrinkage due partially to regulatory change from Euro IV to the Euro V, Euro V not yet reached production levels because Euro IV orders are making it through the books, which is why production is up 3%
§ In China, growth projection of 0% to 4%, slightly up from previous estimation of (1%) to 3%, reason for this is market stabilization
Management Klaus Kleinfeld, Chairman of Board/CEO, (2008)
§ Chairman of Board & CEO, potential source of poor corporate governance § President/CEO (2008-‐2010) § President/COO (2007-‐2008) § Siemens CEO (2005-‐2007), History in tech field § During his tenure at Siemens known for cutting back/shutting down costly
operations or segments, helped increase Siemens profit by 35% to $3.96 billion
§ Turnaround specialist, focus on restructuring, his skill set and track records make him an ideal fir for Alcoa’s current state
§ Left Siemens since not available for a renewal of his contract due to the company’s bribery scandal
§ Board member of Bayer AG, Bilderberg Group, Morgan Stanley
William F Oplinger “Bill”, Executive VP/CFO (2013), § COO: Global Primary Products (2011-‐2013) § CFO (2010-‐2011) § Prior to 2010 held various positions in Alcoa, including § Manager: Corporate Analysis, Director of Investor Relations, Operational
Excellence Director, (2000-‐Unknown) § Held Engineering, Customer Services and Business Planning positions with
Westinghouse and Emerson Electric
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§ Member of Alcoa Executive Council, the senior leadership team that sets strategic direction for the Company
Kay H Meggers, Executive VP/President of Rolled Products (2011)
§ Vice President of Alcoa (2011-‐Unknown) § VP of Corporate Initiatives, Alcoa China strategy (2010-‐2011) § Siemens Senior VP of Building Technologies Division, Business Unit Head of
Building Automation (Unknown-‐2010) § Member of Alcoa Executive Council
Olivier M Jarrault, Executive VP of Alcoa Power and Propulsion/President of Engineered Products and Solutions, (2011)
§ COO: Engineered Products (2010-‐2011) § VP of Alcoa (2006-‐2010) § President of Alcoa Fastening Systems (2002-‐2010) § Fairchild Fasteners, Senior VP, VP of Manufacturing: (1997-‐2002)
Industry Peer Management Comparison ALCOA’S 2013 Total Shareholder Return (TSR)
Source: 2014 Proxy Statement In 2013, Alcoa’s TSR exceeded the TSR of its aluminum industry peers. Alcoa management continued to deliver strong operational and financial performance in the face of major headwinds and persistently low prices for aluminum, which trades as a commodity on the LME. The result of Alcoa’s financial and operating performance in 2013 was a 24.2% total shareholder return, a return nearly aligned with that of the S&P 500® Materials Index. Alcoa’s total shareholder return (TSR) in 2013 was 45 percentage points better than the average 2013 TSR of the Company’s selected aluminum industry peers (-‐21.2%). Aluminum peers include aluminum and alumina producing companies with a market capitalization of at least $3 billion (as of 2010) and some publicly traded shares: Aluminum Corporation of China Limited, United Company RUSAL, Norsk Hydro ASA, Alumina Limited, National Aluminum Company Limited and Shandong Nanshan Aluminum Co., Ltd.
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Stock Ownership of Beneficial Owners: Name of beneficial share owner
Number of shares owned
Percent of outstanding Alcoa common stock owned
The Vanguard Group
74,267,892 6.33%
JP Morgan Chase & Co. 62,417,823 5.32% Blackrock, Inc.
57,411,618 4.89%
Source: Bloomberg Number of Executives: 20 Prior Organizations of Management Teams: Hewlett-‐Packard, Siemens Corporation, General Electric, Westinghouse, Albright Stonebridge Group, Nordural, Avaya & Lucent Technologies, Greenstone Resources Ltd., McKinsey & Company, General Motors, El Paso Corporation, Brown & Root, U.S. Attorney’s Office for the Southern District of New York Average Tenure of Management Team: 2.91 years Average Age of Management Team: 53 years Number of Board Members: 13 Other Board Memberships: Bayer AG (Supervisory Board, Morgan Stanley, International Business Machines Corporation, WPP plc, Mondelez International, Inc., General Motors Company, Hewlett-‐Packard Company, KKR Management LLC, Merck & Co., Inc., Citigroup Inc., Promotora de Informaciones, S.A., The Proctor & Gamble Company, The Boeing Company, U.S. Bancorp, American Electric Power Company, Inc., L Brands, Inc., The Hartford Financial Services Group, Inc., Spectra Energy Corp, Platform Specialty Products Corporation Average Age of Board Members: 66 years Average Tenure of Board Members: 7.13
Source: Bloomberg
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Management Analysis Discussion
§ Separation of Powers: Currently Alcoa’s CEO and Chair of Board is Klaus Kleinfeld. No information on the role of president has been found. It has been determined that the position is either vacant or has been eliminated.
§ Retirement Policy: As a general policy, no director should stand for election or re-‐election to the board if the director has reached age 75 before the date of election or will reach age 75 during the term for which the director is being considered for nomination unless the Governance and Nominating Committee determines that, as of the date of the director’s nomination: (1) the director is serving as a chairman, lead director or similar leadership role in a significant, complex global organization other than Alcoa; or (2) the director is serving as a director of, or is serving in a significant leadership role with, a publicly listed significant, complex global organization other than Alcoa. Other exceptions to the mandatory retirement policy may be approved by a majority of the Board of Directors upon the recommendation of the Governance and Nominating Committee.
§ Board Diversification: The Board of Directors is a diverse and experienced group of individuals who share the goal of increasing shareholder value and the well-‐being of the Company. They have backgrounds in various fields including: industrial manufacturing, electronics, marketing, business, sustainable development, economics, communications, federal government, globalization, public policy, finance, energy, philanthropy, and energy. The directors are citizens of the United States, Germany, India, Mexico and the United Kingdom. The Company has four female directors, one African-‐American director, one Indian director and one Hispanic director out of a total of 12 directors, as of the date of this proxy statement.
§ Compensation Committee: In no way is the compensation committee’s salary or bonus structure tied to annual benchmarks.
§ Shareholder Alignment: The impact of the stock price on executive compensation is significant. 88% of the CEO’s compensation is performance-‐based, and 70% of his compensation is paid in equity form. In addition, the CEO is required to hold six times his annual salary in Alcoa common stock until retirement. The other currently employed named executive officers are required to hold three times their annual salaries in Alcoa. Each director is required to invest 50% of his or her cash fees annually to purchase Alcoa common stock until stock ownership reaches $400,000 (this amount was increased from $350,000 effective January 1, 2013), and each director is required to maintain that investment until retirement from the Board. To satisfy this requirement, directors may defer fees into the Alcoa share equivalent fund under the Company’s 2005 Deferred Fee Plan for Directors, or purchase shares in the market. Compliance with the ownership value requirement is measured annually and if the stock price declines in value, directors must continue to invest in Alcoa stock until the stock ownership guideline is reached.
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CEO EQUITY AWARDS: CHANGE IN VALUE SINCE DATE OF HIRE AS PRESIDENT AND CHIEF OPERATING OFFICER (10/2007 – 6.25 YEARS)
Source: Proxy Statement 2014 Alcoa’s 3-‐year TSR performance has impacted the realizable value of previous equity grants and further strengthened shareholder alignment. As a result of the stock price decline, which coincided with the LME aluminum price drop over which Alcoa had no control, the value of Alcoa CEO’s equity awards is 24% less than the original grant values, which is generally aligned with TSR over that period (Chart 4). This includes $3.4 million in equity grants that were forfeited due to performance below target or the expiration of the option term.
§ Golden Parachutes: If the Board learns of any misconduct by an executive officer that contributed to the Company having to restate all or a portion of its financial statements, it shall take such action as it deems necessary to remedy the misconduct, prevent its recurrence and, if appropriate, based on all relevant facts and circumstances, take remedial action against the wrongdoer in a manner it deems appropriate. In determining what remedies to pursue, the Board shall take into account all relevant factors, including whether the restatement was the result of negligent, intentional or gross misconduct. The Board will, to the full extent permitted by governing law, in all appropriate cases, require reimbursement of any bonus or incentive compensation awarded to an executive officer or effect the cancellation of unvested restricted or deferred stock awards previously granted to the executive officer if: a) the amount of the bonus or incentive compensation was calculated based upon the achievement of certain financial results that were subsequently the subject of a restatement, b) the executive engaged in intentional misconduct that caused or partially caused the need for the restatement, and c) the amount of the bonus or incentive compensation that would have been awarded to the executive had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may dismiss the executive officer, authorize legal action for breach of fiduciary duty or take such other action to enforce the executive’s obligations to Alcoa Inc. as the Board determines fit the facts surrounding the particular case. The Board may, in determining appropriate remedial action, take into account penalties or punishments imposed by third parties, such as law enforcement agencies, regulators or other authorities. The Board’s power to determine the appropriate punishment for the wrongdoer is in addition to, and not in replacement of, remedies imposed by such entities.
§ Takeout Candidates: There is not a policy in the Proxy Statement that discourages this action.
§ Insider Trading: The Company’s Insider Trading Policy prohibits directors and executive officers from holding Alcoa securities in margin accounts or pledging Alcoa securities as collateral.
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§ Leadership Structure: The Company’s current Board leadership structure is composed of a combined Chairman of the Board and Chief Executive Officer, an independent director serving as the Lead Director and strong, active independent directors.
RIO TINTO PLC 22.39 0.92 0.72 1.47 CHINALCO MINING CORP INTERNATIONAL
0.16 0.16 0.31
CENTURY ALUMINUM COMPANY
11.50 48.66 19.69 0.41 0.22 1.88 40.47
KAISER ALUMINUM CORP
37.38 68.03 24.51 2.90 2.03 4.74 80.90
Median 22.05 61.78 29.57 0.44 0.22 1.47 59.18 Note: Blank cells do not have data provided for the metric. Ratio Commentary
v DSO: Median v DOH: Lower DOH than most peer companies, Alcoa takes less time to turn its inventory into
sales v DPO: Higher DPO, takes Alcoa longer time period to pay invoices from trade creditors v Quick Ratio: Median, the Company has a solid liquidity position, (excludes inventory) v Cash Ratio: Lower cash ratio compared to median, but Alcoa is managing their cash balance
efficiently v Current Ratio: Good current ratio, the Company is capable of paying its obligations v Cash Conversion Cycle: Lowest CCC in peer comparison, Alcoa promptly converts resource
inputs into cash flows
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Profitability Ratios Gross
Profit Margin
Operating Profit Margin
Pretax Profit Margin
Net Profit Margin
ROIC ROE ROA
ALCOA INC 12.37 5.43 3.55 2.36 -‐19.33 -‐6.29 NORSK HYDRO ASA 2.73 2.30 1.01 0.01 0.01 UNITED CO RUSAL PLC 15.59 34.67 -‐62.69 -‐63.27 -‐38.44 -‐14.54 RIO TINTO PLC 30.86 1.10 7.30 -‐16.13 7.93 3.19 CHINALCO MINING CORP INTERNATIONAL
-‐5.75 -‐0.85
CENTURY ALUMINUM COMPANY
-‐0.42 -‐3.38 -‐5.04 -‐4.78 -‐7.48 -‐4.13
KAISER ALUMINUM CORP
13.37 9.58 7.52 4.72 7.15 8.04 4.93
Median 12.87 7.51 1.70 1.69 -‐4.49 -‐5.75 -‐0.85 Ratio Commentary
v Gross Profit Margin: Lower than median but still strong with a double-‐digit margin v Operating Profit Margin: Lower than median but solid mid-‐single digit v Pretax Profit Margin: Higher than median, solid margin v Net Profit Margin: Higher than median, solid margin v ROIC: -‐-‐ v ROE: Very negative value due to negative net income, I expect ROE to improve as the
Company executes its strategies that I have outlined earlier on in the report v ROA: Negative value in net due to negative income, management efficiency must increase in
order for the Company to be more profitable relative to its total assets Solvency Ratios Net
RIO TINTO PLC 0.86 20.09 24.43 33.64 0.26 2.49 0.08 3.16 CHINALCO MINING CORP INTERNATIONAL
77.71 71.56 80.96 1.90 6.73 -‐0.46 -‐1.30
CENTURY ALUMINUM COMPANY
11.43 13.00 14.24 20.56 0.22 1.81 -‐0.38 -‐2.60
KAISER ALUMINUM CORP
0.56 6.09 22.14 26.54 0.30 1.63 0.11 3.24
Median 1.76 20.09 22.18 33.64 0.30 2.49 0.05 3.02
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Ratio Commentary v Net Debt/EBITDA: Middle value compared to peers, Alcoa has capacity to decrease its debt
if need be v Net Debt/Capital: Higher than median, debt comprises a significant proportion of their
capital base, although not atypical proportion for the industry v Debt/Assets: Median, compared to the asset base Alcoa has a moderate debt load v Debt/Capital: Slightly higher than median, debt comprises a significant proportion of their
capital base, although not atypical proportion for the industry v Debt/Mkt. Cap: Slightly higher than median, the Company has slightly greater debt load
than industry peers v Financial Leverage Ratio: Slightly more levered relative to the equity on the balance sheet v Interest Coverage Ratio: Strong value, the Company is generating enough cash flow to pay
its interest expenses Investment Thesis Based on the numbers within the metrics and my knowledge of the industry, it would be a smart decision to invest in Alcoa Inc. The aluminum market has experienced a period of growing supply, decreased demand and falling prices. Appropriately, aluminum producers have taken action to decrease their supply and cut their costs. Alcoa has permanently shut down a number of its highest-‐cost plants and continues to seek opportunities for low-‐cost production. The Company is focused on investing now for future growth, cutting its losses directly to generate income in the coming fiscal years. Alcoa has spent a total capital investment of over $10 billion in order to construct a fully integrated aluminum complex in Saudi Arabia, complete with a refinery, rolling mill and the lowest-‐cost smelter in the world. This is one of Alcoa’s major initiatives to be a leader in aluminum production for the future and gain high returns on equity. Other initiatives include investing around $600 million at domestic plants in order to account for projected sheet aluminum demand from the automotive industry. Automakers are planning a significant shift from steel to aluminum in order to help them meet coming fuel economy standards. Instead of incentivizing consumers to buy smaller cars, automakers such as Ford Motor Co., are using aluminum instead of steel to create lighter-‐weight vehicles (see Appendix C for Automotive Industry Shift). Currently due to various investments, a bull market, and shutdown costs, Alcoa’s metrics are not strong. The Company has a higher Debt/EBITDA than peer average while maintaining a “middle of the road” ROE. However, I believe this is not a source of concern. Alcoa is taking the steps necessary to be successful in the long-‐term. Some may not want to take the risk in investing in a stock that is not generating high returns in the present. But Alcoa is a long-‐term stock, a company to invest in for the totality of its cycle. Furthermore, there is a possibility that the stock is undervalued, an attribute HCM vies for. The current valuation is not indicative of the growth opportunities ahead for Alcoa (see page 22 in Appendix B for Projected Earnings Growth).
