This document provides a stock analysis of Alcoa Inc. (AA) including an overview of the company, its financial performance metrics over the past 5 years, a peer comparison table, and the author's investment opinion. Key points are that Alcoa is a leading global producer of aluminum, has permanently closed some high-cost plants to reduce costs, and is investing in production capacity to meet expected growth in automotive aluminum demand. While current metrics are weak due to industry conditions, the author recommends buying the stock for its long-term potential.

1.
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

2. 2
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
Name
Mkt
Cap
(millions) %
Chg
1D %
Chg
3M %
Chg
YTD Est.
PE WACC ROE ROA
EV/
EBITDA
Rev.
Growth
Erngs.
Growth
Operating
Margin
Debt/
EBITDA
Div.
Yield
Best
PEG
Ratio
Alcoa
Inc. 20,095.24
2.98
26.68
61.01
21.58
7.60
0.82
0.27
8.54
(2.82)
#N/A
N/A 4.88
3.12
0.70
2.07
United
Company
RUSAL 57,125.74
(0.27)
9.94
63.48
8.22
11.83
(5.38)
(2.03)
13.74
(10.38)
(525.71)
17.78
4.80
-­‐
#N/A
N/A
Rio
Tinto
Group 90,020.78
1.47
4.20
1.51
10.38
12.03
22.75
9.17
#N/A
N/A 0.45
#N/A
N/A 27.59
1.43
N/a 2.03
Chinalco 11,817.78
2.04
4.17
(5.66)
18.43
6.78
(5.65)
(0.84)
5.28
#N/A
N/A (50.00)
#N/A
N/A #N/A
N/A -­‐
#N/A
N/A
Norsk
Hydro
ASA 77,587.44
2.74
21.75
38.53
20.42
10.41
0.76
0.45
8.09
1.09
(37.85)
3.21
1.56
#N/A
N/A 0.74
Average
51,329.39
1.79
13.35
31.77
15.81
9.73
2.66
1.40
8.91
(2.92)
(204.52)
13.37
2.73
0.23
1.61
Median 57,125.74
2.04
9.94
38.53
18.43
10.41
0.76
0.27
8.32
(1.18)
(50.00)
11.33
2.34
-­‐
2.03

3. 3
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.

4. 4
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
FY
2013 FY
2012 FY
2011 FY
2010 FY
2009 FY
2008 FY
2007 FY
2006
Revenue 23,032$
23,700$
24,951$
21,013$
18,439$
26,901$
29,280$
30,379$
Cost
of
Revenue 20,707$
89.91% 21,861$
92.24% 21,959$
88.01% 18,624$
88.63% 18,213$
98.77% 23,409$
87.02% 24,047$
82.13% 24,598$
80.97%
Gross
Profit 2,325$
10.09% 1,839$
7.76% 2,992$
11.99% 2,389$
11.37% 226$
1.23% 3,492$
12.98% 5,233$
17.87% 5,781$
19.03%
Operating
Expenses 1,200$
5.21% 1,194$
5.04% 1,211$
4.85% 1,135$
5.40% 1,178$
6.39% 1,413$
5.25% 1,682$
5.74% 1,615$
5.32%
Operating
Income 1,125$
4.88% 645$
2.72% 1,781$
7.14% 1,254$
5.97% (952)$
-­‐5.16% 2,079$
7.73% 3,551$
12.13% 4,166$
13.71%
Interest
Expense 453$
1.97% 490$
2.07% 524$
2.10% 494$
2.35% 470$
2.55% 407$
1.51% 401$
1.37% 384$
1.26%
Foreign
Exchange
Losses
(Gains) -­‐$
-­‐$
16$
0.06% 13$
0.06% (82)$
-­‐0.44% 74$
0.28% 26$
0.09% 48$
0.16%
Net
Non-­‐Operating
Losses
(Gains) 2,488$
10.80% (169)$
-­‐0.71% 178$
0.71% 199$
0.95% 158$
0.86% 806$
3.00% (1,678)$
-­‐5.73% 302$
0.99%
Pretax
Income (1,816)$
-­‐7.88% 324$
1.37% 1,063$
4.26% 548$
2.61% (1,498)$
-­‐8.12% 792$
2.94% 4,802$
16.40% 3,432$
11.30%
Income
Tax
Expense 428$
1.86% 162$
0.68% 255$
1.02% 148$
0.70% (574)$
-­‐3.11% 342$
1.27% 1,623$
5.54% 835$
2.75%
Income
Before
XO
Items (2,244)$
-­‐9.74% 162$
0.68% 808$
3.24% 400$
1.90% (924)$
-­‐5.01% 450$
1.67% 3,179$
10.86% 2,597$
8.55%
Extraordinary
Loss
Net
of
Tax -­‐$
-­‐$
3$
0.01% 8$
0.04% 166$
0.90% 303$
1.13% 250$
0.85% (87)$
-­‐0.29%
Minority
Interests 41$
0.18% (29)$
-­‐0.12% 194$
0.78% 138$
0.66% 61$
0.33% 221$
0.82% 365$
1.25% 436$
1.44%
Net
Income (2,285)$
-­‐9.92% 133$
0.56% 611$
2.45% 254$
1.21% (1,151)$
-­‐6.24% (74)$
-­‐0.28% 2,564$
8.76% 2,248$
7.40%
Total
Cash
Preferred
Dividends 2$
0.01% 2$
0.01% 2$
0.01% 2$
0.01% 2$
0.01% 2$
0.01% 2$
0.01% 2$
0.01%
Other
Adjustments -­‐$
-­‐$
-­‐$
-­‐$
-­‐$
-­‐$
-­‐$
-­‐$
Net
Inc
Avail
to
Common
Shareholders (2,287)$
-­‐9.93% 131$
0.55% 609$
2.44% 252$
1.20% (1,153)$
-­‐6.25% (76)$
-­‐0.28% 2,562$
8.75% 2,246$
7.39%
Abnormal
Losses
(Gains) 2,506$
(128)$
275$
230$
202$
939$
268$
543$
Tax
Effect
on
Abnormal
Items (207)$
(11)$
(89)$
(81)$
(74)$
(406)$
(94)$
(164)$
Normalized
Income (4,587)$
270$
423$
103$
(1,281)$
(609)$
2,388$
1,867$

5. 5
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

6. 6
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)
Current
2013
2012
2011
2010
2009
2008
P/E
180.51
179.36
13.22
36.14
39.92
11.61
8.38
EPS
-­‐2.21
-­‐2.14
0.18
0.57
0.25
-­‐1.23
-­‐0.10
PEG
4.76
4.67
3.60
3.94
10.08
1.36
0.68
ROE
0.82
0.12
0.71
5.99
3.08
-­‐7.14
5.50
ROIC
3.07
-­‐-­‐
2.11
5.45
3.81
-­‐-­‐
4.86
WACC
8.21
8.35
7.66
8.25
11.76
11.45
9.01
Revenue
Last
12M:
22,640
23,032
23,700
24,951
21,013
18,439
26,901

7. 7
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

8. 8
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.

9. 9
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

10. 10
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

11. 11
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

12. 12
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%

13. 13
§ 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

14. 14
§ 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.

15. 15
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

16. 16
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.

17. 17
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.

18. 18
§ 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.
Financials
Activity
and
Liquidity
Ratios
Days
of
Sales
Outstanding
(DSO)
Days
of
Inventory
on
Hand
(DOH)
Days
of
Payables
Outstanding
(DPO)
Quick
Ratio
Cash
Ratio
Current
Ratio
Cash
Conversion
Cycle
ALCOA
INC
22.05
55.53
52.97
0.44
0.20
1.26
24.60
NORSK
HYDRO
ASA
0.47
0.47
1.69
UNITED
CO
RUSAL
PLC
7.03
105.49
34.63
0.26
0.21
1.12
77.89
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

19. 19
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
Debt/
EBITDA
Net
Debt/
Capital
Debt/
Assets
Debt/
Capital
Debt/
Mkt.
Cap
Financial
Leverage
Ratio
CF/
Debt
Interest
Coverage
Ratio
ALCOA
INC
2.66
31.51
22.18
35.39
0.51
3.13
0.05
3.02
NORSK
HYDRO
ASA
0.28
-­‐0.83
8.77
11.83
0.15
1.65
0.23
3.84
UNITED
CO
RUSAL
PLC
4.49
58.27
52.86
62.30
2.40
2.70
0.01
0.14
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

20. 20
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).

21. 21
Appendix
A
Aluminum
Production
Process

22. 22
Appendix
B
Complete
Table
of
Bauxite
Interests
Projected
Earnings
Growth

23. 23
Appendix
C
Automotive
Industry
Shift

24. 24