Key Opportunities And Threats For Alcoa In 2015 (Part 9 of 17)

(Continued from Part 8)

So far in this series, we’ve looked at the upstream and midstream operations of Alcoa (AA). The real value addition, though, comes from the engineered products segment, otherwise known as Alcoa’s downstream operations. This segment, which is divided into five groups, fabricates aluminum into custom shapes and sizes for end users:

• power and propulsion – manufactures parts for jet engines and industrial gas turbines
• fastening systems – manufactures fasteners for aerospace and automotive
• buildings and construction systems – manufactures commercial architectural systems
• wheel and transportation products – manufactures commercial vehicle wheels
• forgings and extrusions – manufactures large and complex fabricated parts for use in various end industries

The chart above shows Alcoa’s value-added portfolio of products. These help to cushion Alcoa’s profit margins. The EBITDA (earnings before interest, taxes, depreciation, and amortization) margin for this segment hit a record high of 23.5% in the third quarter. The EBITDA margin for Alcoa was 16.5% that quarter. Read more about Alcoa’s results in its third quarter .

Alcoa’s value-added business is expected to be a key driver in 2015. Unlike its upstream and midstream businesses, the fundamentals of Alcoa’s downstream business are largely immune from aluminum price volatility.

The earnings of primary producers including Rio Tinto (RIO), Aluminum Corporation of China (ACH), and Century Aluminum (CENX) are largely a function of aluminum prices and premiums. The SPDR S&P Metals and Mining ETF (XME) invests in these companies.

Alcoa contributed ~95% of its growth capital toward developing its value-added business. Most of this capital went into the important Firth Rixson acquisition, another key driver for Alcoa, as we’ll see in the next part of this series.

Continue to Part 10

Browse this series on Market Realist:

• Part 1 - How Alcoa Looked In 2014
• Part 2 - Aluminum Plays Exercise Restraint And Deliver The Goods In 2014
• Part 3 - Outlook 2015: Alcoa Set To Benefit