Is this Aluminum Play Bullish Despite the Metal Glut?
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Investors are generally bearish on aluminum due to the lingering market glut of the metal and its depressed prices. Nevertheless, there are some aluminum-related equities which still look worthy, one of which is Constellium (NYSE: CSTM).
An aluminum fabricated products manufacturer based in the Netherlands, this company’s IPO was met with lackluster reactions this May. Could it be a spillover of the negative sentiments that mining and aluminum have been reaping lately? Maybe it was.
Strong legacy missed?
On its first trading day, May 23, Constellium shares dropped by as much as 12% of its initial public offer price of $15 per share. In the ensuing weeks, however, some strength manifested, eventually sending the share price to a post-IPO high of $16.81 on July 1.
Notably, the company is a relatively new name in the aluminum universe. Its corporate identity was born only in 2011 but it carries the legacy of three companies strongly associated with the aluminum industry: Alcan, AluSuisse and Pechiney. Constellium was formed after one of its major shareholders, Rio Tinto (NYSE: RIO) acquired Canadian aluminum manufacturer Alcan for $38 billion in 2007. Rio Tinto divested a part of the engineered products division of Alcan in 2011 and named it Constellium.
A carnival outside Rio
Unlike the miner Rio Tinto, Constellium has underlying strength in its limited exposure to the current volatility of metal prices and mining headwinds such as the slowdown in manufacturing in China and surpluses in the metals markets. On the other hand, Rio Tinto incurred a net loss of close to $3 billion in 2012, the first setback in its history, as a result of impairments against its aluminum and coal assets.
While it may not be carnival time for Rio, Constellium’s focus on the fabrication of products for the aerospace, automotive and packaging industries has many potential growth catalysts. One is Boeing (NYSE: BA), which is among the major clients of the Aerospace and Transportation unit of Constellium.
More plane orders
Boeing recently raised by 3.8% its annual 20-year market forecast for new aircraft deliveries following improved demand expectations for singe-aisle airplanes, mainly from the Asia Pacific market. In the next 20 years, a $4.8 trillion market for 35,280 airplanes is expected.
The shorter term outlook for Boeing provides a more immediate investing incentive for this equity and Constellium as well. The aircraft manufacturer, in reporting its 2013 first quarter results, also disclosed a strong backlog of over 4,400 airplanes worth a record $324 billion. In this year’s first quarter, the company’s core EPS (non-GAAP) increased 2.4% to $1.73 following a strong operating performance.
On the other hand, Ball (NYSE: BLL), a Constellium peer in aluminum metal fabrication, can’t be expected to make headway with its aerospace unit. This segment’s revenues are mainly derived from contracts with U.S. government agencies like NASA whose budgets are under sequestration. Also, Ball is being punished by soft volumes at its European packaging operations and the loss of customers in China due to pricing pressure. Negative investor sentiment on Ball was reinforced as its 2013 first quarter adjusted EPS dropped 8% to $0.58, missing analysts’ consensus estimates of $0.64.
Other fundamental strengths
Not to be overlooked as another positive for Constellium’s future is its exposure to the automotive industry, where there is a continuing increase in steel to aluminum substitution. The company can likewise draw upon its robust R&D. Already in its armory is what the company calls a breakthrough technology: Airware® aluminum-lithium material. It was developed via research on nanoscale strengthening which resulted in a unique material designed for all components of an aerostructure. As a follow-through, initiatives are underway for the company’s Paris-based Aerospace and Transportation division to develop a closed-loop recycling process to recover Constellium’s unique aerospace alloys, one of which is Airware.
The technological strength of the company was manifest in its 2013 first quarter results. For the period, it weathered a drop in volumes via improvements in product mix, resulting in particular to an increase in sales to aerospace customers. Adjusted EBITDA for the most recent quarter rose 20% to €73 million. Operating cash flow, excluding margin calls, saw a 13% improvement from a year ago. A €356-million loan refinancing has also been successfully completed. The 2013 first quarter results are in line with the indicated ranges in the final prospectus for the company’s recently completed IPO.
To sum up, neither the current headwinds for metals and mining nor its so-so market debut should be a dampener for initiating action on Constellium. Bullish long-term undertones in the aerospace and automotive sectors portend bright prospects for the value-added aluminum products that it manufactures. Notably, several analysts have initiated coverage on the company lately with their ratings ranging from buy to outperform.
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