Sustainable and Profitable Growth of Alcoa - Essay Example

Contents Alcoa is the leading producer of aluminum products and is considered as the largest organization which has the product base of sustainable products. Over the period of time it has been able to grow at good rates besides the fundamentals in the industry are changing favorably. Apart from that the Company is working in an industry which has strong expectations of increase in demand due to increasing economic trends in emerging markets of the world. Based on the future outlook of the industry and changing demand dynamics, Alcoa is one of the most lucrative takeovers to be made. Executive Summary Alcoa is one of the leading organizations in the world working in Aluminum industry with presence in many countries. It has a large product base – most of them are considered as most sustainable products. Serving different markets ranging from Aerospace to consumer packaging industry, Alcoa, over the period of time has been able to generate strong growth rates. Further it is also being continuously expanding into various markets and currently most of its revenue growth is coming from China. Based on the projections of the China’s future economic performance and strong demand being generated from that region, it is largely believed that the future performance of the company would largely depend upon how the Chinese economy performs. This is also because of the fact that the growth in North American markets for the company has been negative and considering the recent credit crunch in the market, it is largely anticipated that the demand from the traditional region of business for Alcoa would decrease substantially and company has to rely on the other markets to develop. Based on the revenue growth rates, strong chances of increase in the aluminum prices and the growing demand from the emerging markets, Alcoa is a good option to make an acquisition of the company. Background about company Alcoa is the leading producer of primary aluminum, fabricated aluminum as alumina facilities and is also an active player in other aspects of the industry also. It products are served in markets like Aerospace, Alumina, Aluminum Ingot, Automotive, Building and construction, commercial transportation, Industrial Products and services as well as packaging and other consumer products. “In addition to aluminum products and components including flat-rolled products, hard alloy extrusions, and forgings, Alcoa also markets Alcoa® wheels, fastening systems, precision and investment castings, and building systems” (Alcoa, 2008). The company has a presence in almost 34 countries with 97000 employees working for the company in various positions in various countries. It has been the honor of the company that it has been labeled as most sustainable company in the world in World Economic Forum, Davos, Switzerland. The company has a record of working on creating an environment which is often considered as safer company to work for. It is because of this reason that it has been 10 times safer to work in Alcoa during 2006 than it was in 1992. The products produced by the company are considered as one of the highest quality sustainable products as most of the products being manufactured by the company are in use even after decades after their production. It is because of this reason that the market share of the company has consistently increased during last five years as it has been able to register a total market share of 30.4% in 2006 which was 21.2% in 2001. Such a dramatic increase in the market share provides a clear indication of the strength of the company and its place in the market. Most of its products are used in consumer market mostly for packaging purposes. One of the most important aspects of the company is its ability to innovate. It is because of this reason that considering the fast moving market conditions, Alcoa has been constantly engaged into the formation of strategic alliances with external players so that the strategic areas of the research and development could be shared along with the gaining of more and better efficiencies. Its innovation strategy is based on three core pricinciples of innovations are based on the fact that company first research the new products and then based on the principles of applied engineering develop the products which are often considered as most sustainable products in the world. It is because of this reason that the company’s products are considered as the most sustainable in the world. Further the company being a B2B company often helped evolved various other industries especially aerospace industry as more than 90% of the use of raw materials is of aluminum in nature and company being one of the giants of the trade have provided enough technological innovation to the industry to evolve over the period of time. It must also be noted that due to recent trends in the industry which is witnessing strong consolidation, company has made the efforts to takeover rival Canadian firm Alcan however, the bid was unsuccessful. However, on the other hand companies like BHP and Rio Tinto has made the takeover offers to the company also suggesting the current growth patterns of the company has made it one of the most sought after company. On the whole Alcoa is one of the best companies in the industry and is considered as socially responsible company engaged into the production of sustainable products necessary for conservation of environment. Assessment of the Company’s future performance Before discussing the future performance of the company it is very important that we must first analyze the past performance of the company. As discussed above, over the period of time, the company as been able to increase its market share and with the presence in many countries, it is not far from imagining that the company is going to perform strongly in the near future also. “In the past half dozen years, Alcoa has substantially increased its revenues and earnings and established the launching platform for significant growth to come. Weve added to the breadth of our product lines and processing expertise. We have expanded–and will expand further–the global share of markets for which we compete.” (Alcoa, 2008). This quote suggest the strategy company has adopted over the period of time to generate its growth in various geographical zone where it is working. Starting with the revenue growth, a five year analysis of the data would suggest that the company has recorded growth rate of 43% i.e. $21,504 million in 2003 to $30,748 Million in 2007. This growth in the revenue is inline with the increase in the market share of the company also as it has gradually evolved from being the third largest company in the sector to the largest company in the sector. This has been due to the fact company has been able to diversify its portfolio of products and braodened its base of products and markets as well in order to cater larger markets especially China. A futurastic analysis of the performance of the company thus would require to include different variables into our analysis. The company intends to achieve its future growht many based on its concentration on development of the packaging and autocasting businesses. This segement of the sector is going to provide the largest growth in the future for the company. Further to this, the basic fundamentals in the aluminium market are improving which provide the company a better future outlook at least in the short term. (BARY, 2008). Further, the projected growth rates for 2007 suggested that the most of the demand to come from China with projected growth rates of 35.8% as the company has already made an entry into that market and extensively serving the demand generated from that region. Further, the projected rates for Alcoa’s traditional North American market are not projected favorably by the company itself suggesting that the market has been saturated and given the shifting patterns of the demand dynamics, it would not be far from projecting that the presence of the company in North American region would be minimal in terms of its demand and supply generation capability. Further the credit crunch in the North American market suggest that the demand from the automative sector is going to decline. This is also due to the fact that the major buyer of company i.e. Ford and Chrysler have reduced their overtime therefore the demand in this sector is projected to be slowing down. However, the most important segment of the market which seems to be lucrative for the company is the aerospace market which is providing strong demand to the company. Thus it can be therefore inferred that the future performance of the company would largely depend upon how the company is going to cater its aerospace business. It is also largely believed that the changing fundamentals in the industry are going to work in favor of the company as it is largely being porjected the prices of aluminimum are going to increase in 2009 due to supply strains on the bauxite. Thus based on these projections, the stock price of the share is also expected to rise to $ 50 per share. This suggest a very strong year to come for the company. “Aluminum prices, largely dormant in recent years, have perked up, rising 20% this year. Chinese producers, which have accounted for much of the growth in aluminum capacity in the past five years, are getting squeezed by higher costs for electricity and alumina -- refined bauxite. Aluminum demand is growing at a 6% annual clip because the metal is lightweight, recyclable, cheap compared with copper (with which it shares many uses) and plays a role in various products and activities, ranging from beverage cans to airplanes to construction.” (BARY, 2008). Since company works in a business 2 business environment therefore strong derived demand would increase directly the demand for the company’s products therefore the revenue growth is evident in the near future. Further the nature of the products of the company and their perceived sustainability and durability provide an extra advantage to the company to create competitive advantage based on the differentiation strategy thus allowing to successfully withering the competition also. The future trends that are emerging from the industry are also pointing towards the consolidation of the industry as there have been repeated attempts by Alcoa to make a hostile takeover of many companies including its Canadian rival, Alcan. This trend also suggest that the industry dyanmics would soon change where Alcoa may find it competing against the industry giants with considerable market shares achieved through the consolidation. (BBC, 2007). However, though the company is considered as socially responsible and producing the sustainable products however the increasing enviornmental threats are considered as one of the biggest challenged which companies in the sector would face. Enviornmental challenges therefore would also be the key drivers behind the future performance of the companies working in the industry including Alcoa. On the whole, the future performance of the company based on the increasing consolidation of the industry, strong aluminum prices, cooling down of the credit crunch would ultimately lead to the improved performance of the company in future. Methodology This analysis has been done on the patterns of the case study as the analysis of the future performance of the company depended largely on different and potentially related and unrelated factors. The methodology adopted for this analysis was therefore based on the collection of both qualitative as well as quantitative data. Qualitative as well as quantitative data collection has been made both for the company and its market information. Therefore the chief source of data was the annual financial statements of the company as well as information present on the website. While analyzing the financial data, we have relied on the information present in audited financial statements which can be easily accessed from the website of the company. In financial data, we have analyzed the data from 2003 to 2007 therefore all the growth rates of revenue has been based on this time period. While analyzing the financial data, we have largely based our analysis on two factors i.e. revenue growth and the dividends growth. Revenue growth rates of the company have been computed for the period mentioned above. Further the qualitative data has been obtained from the various articles appeared in different industry journals and newspaper websites which are being properly referenced at the end of the report. Recommendations The recent trends in the industry, strong performance in terms of its revenue generation, increasing expectations from the investors regarding the future of the company, the increasing consolidation of the industry suggest that the company is a strong target for the takeover. This analysis can also be corroborated by the fact that other companies like BHP and Rio Tinto have made the bids to takeover the company. Further the company has adopted the strategy of offering dividend in line with the competitive dividends being offered by other companies in the industry. The company has been continously paying dividends over the period of eight years with maximum dividends being paid out amouting to $0.17 per share suggesting the strong payout ratio of the company. Since dividends payment provide one of the strongest indicators of the performance of the company therefore it can be easily assumed that the investors have enough confidence in the company and its future performance. Our recommendation also include the fact that company has strong growht prospects in China suggesting that the short to medium term performance of the company would be strong and sustainable in nature. Our recommendations therefore would be to go for the acquisition of the firm however; EIG should also devise a strategy as to how it can disinvest it in future after creating value for its shareholder. Bibliography Alcoa. (2008). About Alcoa : Overview. Retrieved June 13, 2008, from www.alcoa.com: http://www.alcoa.com/global/en/about_alcoa/overview.asp Alcoa. (2008). Committed to sustainable, profitable growth. Retrieved June 13, 2008, from www.alcoa.com: http://www.alcoa.com/global/en/investment/overview.asp?lc=2 BARY, A. (2008, June 15). Alcoa to Enjoy Rising Prices,. Retrieved June 15, 2008, from The Wall Street Journal: http://online.wsj.com/article/SB121347789796675245.html?mod=yahoo_hs&ru=yahoo BBC. (2007, Feburary 13). Mining firms eye Alcoa takeover. Retrieved June 13, 2008, from BBC News: http://news.bbc.co.uk/1/hi/business/6356185.stm Read More