Alcoa Bets Big on Aerospace: Will Firth Rixson Transform the Company?
Alcoa Inc (NYSE:AA) shares are sitting near 52-week highs after the company announced the acquisition of Firth Rixson for $2.85 billion. While Rixson is not a household name, the move itself could signal a strategic gift for shareholders that could catapult Alcoa shares much higher.
Alcoa is a global manufacturer and seller of aluminum-based products. In the last year, its stock has nearly doubled — not because of growth but rather supply, demand, and pricing stability for its products. Alcoa operates in all industries where aluminum is relevant, many of which are strong and some of which are weak, but the company’s footprint includes non-aluminum segments.
Aerospace is one of its strongest industries, along with automotive, as the company foresees growth of 8 to 9 percent globally in aerospace over the next year. Therefore, if the company could strengthen its position in the aerospace, or benefit more from its growth, then theoretically the company could fundamentally perform better.
Therefore, investors were encouraged by its acquisition of Firth Rixson, a deal that will add 20 percent to its top-line in the aerospace space to $4.8 billion, and a company that’s expected to increase revenue by 60 percent to $1.6 billion by 2016. The deal shows that Alcoa is able to identify lucrative high-growth markets and is willing to move quickly in order to grow stronger in a thriving industry.
Already, investors have witnessed strong commercial jet and other aircraft demand, most notably from Boeing (NYSE:BA), who has a growing backlog. Boeing has just recently obtained several new orders, but in the company’s shareholder meeting management disclosed that its backlog had surpassed $440 billion. In other words, Boeing now has enough orders to continue operations for five years even if it doesn’t gain one new order. Not to mention, new orders for other top aircraft manufacturers continue to increase. Therefore, Alcoa’s acquisition of Rixson seems to be about timing and gaining an asset that can benefit from what appears to be an industry of consistency, and component makers like Rixson combined with Alcoa and its aluminum business could create a nice spark for investors.
With that said, the Rixson acquisition does not come without risks. Its $2.85 billion price tag is rather expensive for a company that has $7.75 billion in debt. Hence, if aluminum prices don’t stay high, and aerospace doesn’t remain strong, Alcoa could find itself in far worse shape than it was in early 2013. However, most transformative acquisitions have risks, and in this case, demand in aerospace suggests that Alcoa and its investors will come out on the winning side of this buyout investment.
[Editor’s Note: This article originally mistakenly said that Alcoa’s top-line aluminum revenue would increase as a result of the deal instead of aerospace revenue. This article has been edited to fix that mistake. Firth Rixon’s revenue growth through 2016 was also corrected. Some language has also been changed for tone.]