What's Fueling Alcoa's (AA) 11% Gain?

Updated from 3:31 p.m. EDT to include aluminum price projections in the fourth paragraph. 

NEW YORK (TheStreet) -- Alcoa (AA) closed 8.8% higher to $9.36 after an 11.6% spike mid-afternoon. Flat in the early portion of the day, the stock hit its stride at midday to reach a new 52-week high.

Fueling the spike is an across-the-board rally for aluminum producers and a series of positive announcements from the company's management.

Alcoa far surpassed the industry in share price growth, followed by Century Aluminum  (CENX) which gained 8.1%, Aluminum Corp of China (ACH) up 3.7%, Australia-based producers BHP Billiton (BHP) and Alumina Limited (AWC) climbing 3.2% and 2.4% respectively, and Noranda Aluminum Holding  (NOR) 4.7% higher. Kaiser Aluminum  (KALU) lagged the group, gaining 0.94%.

Bloomberg credits speculation on future aluminum prices as spurring an industry rally, noting aluminum for delivery in three months rose 2.2% on the London Metal Exchange. The publication also said that investors closing out stock short options could have been a trigger to its meteoric rise. 

Also influencing Alcoa's gains, the New York-based company announced it has partnered with Russia's VSMPO-AVISMA to provide high-end titanium and aluminum to aircraft manufacturers internationally.

"The agreement marks an important step in leveraging Alcoa's and VSMPO-AVISMA's strengths in innovation and manufacturing to capture opportunities in the high-growth aerospace market," said CEO Klaus Kleinfeld in a statement. "This alliance will enhance Alcoa's competitiveness and position our global aerospace business for continued profitable growth."

The joint venture, expected to be operational in 2016, will take advantage of the burgeoning aerospace market, an industry Alcoa forecasts will grow 9% to 10% in 2013 alone.

The creator of forged aluminum wheels said it has improved upon its invention, developing a product lighter and stronger than the industry standard. The new alloy designed for use in trucks will increase fleet payload and improve fuel efficiency.

Alcoa expects to introduce the alloy to market by early 2014. Alcoa's Engineered Products and Solutions division, which developed and will manufacture the product, contributed 25% of the company's $5.8 billion in total third-quarter revenue.

TheStreet Ratings team rates Alcoa Inc as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about its recommendation:

"We rate Alcoa Inc (AA) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, impressive record of earnings per share growth and notable return on equity. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Metals & Mining industry. The net income increased by 116.8% when compared to the same quarter one year prior, rising from -$143 million to $24 million.
  • Alcoa Inc reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Alcoa Inc reported lower earnings of 17 cents a share vs. 52 cents a share in the prior year. This year, the market expects an improvement in earnings (35 cents vs. 17 cents).
  • Net operating cash flow has decreased to $214 million or 18.63% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, Alcoa Inc has marginally lower results.
  • AA has underperformed the S&P 500 Index, declining 6.43% from its price level of one year ago. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.

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