George Soros, “The Man Who Broke the Bank of England,” has picked up a stake in Alcoa Inc. (NYSE:AA) - a metals and mining company, with a focus on aluminum and alumina. The Soros Fund Management LLC, in a filing released earlier this week, revealed its purchase of 5,338,700 shares of Alcoa, at a total value of $59.5 million, during the second quarter.
The filing follows Alcoa’s stock hitting its 52-week low of $9.24 in during the trading session on August 18. The stock closed at $9.27, after losing 1.70% in yesterday’s trading session.
The meltdown of the commodity market has left companies in the industry struggling, with Alcoa losing 41.29% of its stock value, year-to-date (YTD). We, at Business Finance News, look at some of the probable reasons behind George Soros’ interest in the mining company at a time when the industry is going through a downturn.
Earnings
Alcoa reported a $5.9 billion top line figure in its second quarter ending June 30. The analysts’ estimate of $5.81 billion was surpassed due to the company’s strong growth in the downstream segment, which includes its aerospace, automotive and alumina businesses.
Re-strategizing
The appointment of Klaus Kleinfeld as Alcoa’s CEO has resulted in a revamp of the metal manufacturer’s business strategy. The company’s focus has been shifted from its traditional upstream commodity base to an expansion and development into midstream and downstream businesses. In 2014, the company’s upstream division brought in less than 50% of its After Tax Operating Income (ATOI) due to their high exposure to aluminum prices and the prevailing commodity slump.
Development of Downstream Division
Alcoa is primarily a mining company, but the recent commodity market slump and the weakening financials called for immediate change. The company has effectively decreased its upstream asset base through asset sales and closures of mines while expanding into downstream and midstream through acquisitions and divestitures.
Mergers & Acquisitions (M&A)
Alcoa has spread itself into the aerospace and automotive industry in an attempt to diversify its product mix. The company acquired RTI International (NYSE:RTI), which is a global supplier of titanium and specializes in metal products and services, in July 2015. The acquisition will aid in Alcoa rising to the top in aerospace solutions supplier through expansion of its Engineered Product Solutions (EPS) division. The acquisition is expected to cut the mining giant’s costs by around $100 million in 2019.
Furthermore, Firth Rixson, jet engine manufacturer will be purchased for $2.35 billion in cash and $500 million in stock. The deal, valued at $2.85 billion, is expected to close by the end of 2015. The acquisition is expected to boost Alcoa’s annual sales in the aerospace industry by 20%.
Aluminum Price Exposure
While Alcoa’s operations remained centered towards mining, their exposure to aluminum prices was high, with low prices weighing down on the company’s earnings. However, since the initiation of the mining company’s addition of value-added businesses to its portfolio, Alcoa’s top line figures have become less dependent on aluminum prices. Despite low aluminum prices, Alcoa’s revenue grew 1% year on year. The company has increased its asset base in midstream/downstream by more than 50% in 2015.
Stock Performance
Since early 2015, Alcoa’s 50-day moving average has been below the 200-day moving average; a potential “death cross”. However, bullish analyst forecasts have not taken this into consideration, as the 50-day moving average is not the best indicator of the company’s internal growth.
It is important to note that the Securities and Exchange Commission (SEC) filing released by Soros’ Fund Management was for the time period of April 01 to June 30. Throughout the month of June, Alcoa’s stock remained in oversold territory, which points toward undervaluation. It left room for upward correction in the stock price, partially explaining Mr. Soros’ interest in the company. While the Relative Strength Index (RSI) has finally moved out of over-sold territory, it is still at 35.89, leaning towards oversold readings.
The stock price has been under the consensus price target since September 2014, which shows that even though Alcoa had been struggling, analysts remained bullish. As of today, 11 analysts have recommended a Buy and only one advises a Sell.
The 12-month consensus target price is $14.33, which implies upside potential of 54.58% over the stock’s closing price of $9.27, as of August 18.
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