Transcript Valuation of Alcoa Inc.

Valuation of Alcoa Inc.
Advanced Corporate Finance
Teodora Spasova
04/25/06
Outline
 Industry
Profile
 Company Profile
 Business Environment
 Strategic Plans
 Financial Performance
 Valuation
Industry Profile
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A procyclical industry- follows the overall performance of
the economy
Aluminum is a commodity that is traded on the London
Metal Exchange (LME) and priced daily based on market
supply and demand
Serves a number of growing markets-alumina, aluminum,
aerospace, packaging and consumer, industrial products,
automotive, building and construction, commercial
transportation
Very high barriers to entry
Industry Performance

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

Industry Performance
Source: SmartMoney.com
Company Profile

Sector: Basic Materials
 Industry: Aluminum (6 segments):
–
–
–
–
–
–
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Alumina-the mining of bauxite
Primary Metals-aluminum ingot
Flat Rolled Products
Engineered Products
Extruded and End Products
Packaging and Consumer
Full time employees: 129,000 in 42
countries
Key Statistics

Market Cap- 30.79 B
 Total Revenue-26.2 B
 Total Assets-33,696,000
Source: Yahoo!Finance

Quote: AA
 Index membership: DJIA, DJComposite,
S&P500, S&P100, S&P1500 SuperComp
 Exchange: NYSE
Company Profile – Cont.

Trademarks (Packaging & Consumer): Alcoa®
wheels, Reynolds Wrap®, Baco® household
wrap, Howmet® metal, Huck® fasteners
 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
 During 2005 it discontinued the business of
Southern Graphic Systems Inc
Business Environment
Alcoa is the world’s leading producer of
aluminum, fabricated aluminum, and alumina
 The company is active in all major aspects of the
industry: technology, mining, refining, smelting,
fabricating, and recycling
 Aluminum and alumina represent app. ¾ of
Alcoa’s revenues
 The price of aluminum influences the operating
results of Alcoa

Business Environment-Cont.
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A global company with largest market in North
America (61% of 2005 Revenues), followed by
Europe (23%)
 Investments in China, Russia, Brazil, Australia opportunities for growth
 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
Some industry trends in 2005
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Continued strong demand for aluminum
 Pressure on prices driven by tight aluminum
markets
 High material and energy costs
Financial Performance 2005
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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

Divested/Restructured
Smelting
HAW
Eastalco

Elkem Equity
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Aluminum Downstream
Automotive Casting
Cast Auto Wheels
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Acquired/Invested
Refining
Suriname
Pinjarra
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Energy
Three Oaks Mine, Friendsville
mine
U.S. hydro, Latin America hydro
Warrick power plant
Non-aluminum
Integris
Southern Graphics
AFL-Telecommunications
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Smelting
Iceland, Alumar stubline
Ghana restart
European modernization
Other restructuring
7% headcount reduction
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Rolling
Russia, Bohai. Shanghai,
Aerospace
Financial Performance- Cont.
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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
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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 1Q 2006
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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
Seasonal declines in
consumer products, building
and construction
Strategic Goals and Priorities 2006
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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.
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Portfolio Management
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Monitor the progress of underperforming assets
and make appropriate adjustments to strengthen
the portfolio
Profitable Growth
-
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
Trends in Major Markets
$2.60
10%
$2.70
10%
$2.70
10%
$1.80
7%
$3.40
13%
$6.80
26%
$6.20
24%
Aluminum and alumina
Packaging and Consumer
Industrial Products
Automotive
Aerospace
Building and Construction
Commercial Transportation
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
EquiTrend® as the greatest
brand equity for the second
straight year
– Alcoa segments: FlatRolled 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
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Assumptions:
CAPM
Risk-free rate: 4.86%
Market Risk premium: 6.40%
Beta: 1.91
Tax Rate: 22.8%
WACC: 15.18%
 Projection
5-year non-constant growth: 10%
Constant growth: 3%
Valuation-Cont.
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Results:
Price per share: $34.80
Current Price (as of 04/21/06): $35.39

Recommendation: hold
Comparative Analysis
Competitors
 Strengths / comparative advantage
 Weaknesses

Main Competitors
Alcoa Inc Alcan Inc
Century Aluminum
Company
Aluminum
Corporation
of China
Market Cap
$30.79B
$19.47B
$1.61B
$11.41B
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
0.71
0.63
0.39
n/a
Competitive Advantage
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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
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Not sufficient use of underperforming assets
Need better control of cost savings and increase of
productivity
Better focus on product mix, pricing and new product
application
And Finally…
Thank you!