hawkeye pride alcoa, inc. (nyse: aa)alcoa inc. (nyse: aa) is a global leader in lightweight metals...

Important disclosures appear on the last page of this report. AA | 1

Krause Fund Research Fall 2015

Hawkeye Pride Recommendation: HOLD

Research Analysts

Brandon Svac

[email protected]

Coner Elliott

[email protected]

Connor Frischmeyer

[email protected]

Andrew Namanny

[email protected]

Company Overview Alcoa Inc. (NYSE: AA) is a global leader in lightweight

metals engineering and manufacturing. Alcoa’s innovative,

multi-material products, which include aluminum, titanium,

and nickel, are used worldwide in aerospace and automobile

manufacturing, commercial transportation, packaging,

building and construction, oil and gas, defense, consumer

electronics, and industrial applications. Founded in 1888 in

Pittsburgh, PA, Alcoa currently is headquartered in New

York, NY with international operations in 30 countries

(mainly the United States and Europe). Alcoa is diversified

into four major businesses: Engineered Solutions, Global-

Rolled Products, Primary Metals and Alumina. For the fiscal

year ended 12/31/2014, total revenues rose 3.79 percent to

$23.906 billion.

Stock Performance Highlights 52 week High $17.75

52 week Low $7.81

Beta Value 0.678

Average Daily Volume 26.2 m

Share Highlights Market Capitalization $10.57 b

Shares Outstanding 1.21 b

Book Value per share $9.63

EPS $0.42

P/E Ratio 6.74

Div idend Yield 1.27%

Div idend Payout Ratio 32.55%

Company Performance Highlights ROA 0.73%

ROE 2.34%

Sales $23.91 b

Financial Ratios Current Ratio 1.49

Debt to Equity 0.6%

Profit Margin 1.12%

Alcoa, Inc. (NYSE: AA)

November 13, 2015

Current Price $7.99

Target Price $10-16

AA Recovery on the Horizon

Maintaining current portfolio holdings with a HOLD

rating and $10-16 price target. Current share price reflects

the low global trading price for aluminum and other

commodities.

The economic slowdown in China has negatively

impacted commodities businesses over the past year, but the

effects should diminish in upcoming years as commodity

firms cut capacity, reduce costs and inventory surpluses, and

maintain a competitive advantage in the shrinking market.

Increased demand for light vehicles in the United States

and growing demand for housing and commercial business

loans in Europe signal a return of consumer confidence

domestically, and potential for increased construction abroad.

As an industry leader in the Metals & Manufacturing

Sector, Alcoa continues to perform comparably to the

industry baseline, XLB, with the exception of year-to-year

growth rates. The S&P 500’s Materials sector historically

outperforms the entire index, showing future return potential.

Alcoa utilizes vertical integration in order to grow their

downstream operations in their Global Rolled Products and

Engineered Products & Solutions segments. In 2014 and

2015, Alcoa acquired Firth Rixson and TITAL, respectfully,

which added diversified aerospace manufacturing operations

to their Engineered Products & Solutions segment. These

segments are expected to grow substantially by 2022.

One Year Stock Performance

Source: Yahoo! Finance


Executive Summary Given available information, we believe that investors should

HOLD Alcoa. We believe that the value of the firm will continue

to increase in coming years, and it would be disadvantageous to

investors to sell their existing shares. Additionally, we do not feel

strongly enough in Alcoa’s future performance to suggest that the

investors purchase additional shares of Alcoa at the current price.

Alcoa is a strong company that unfortunately does business in a

particularly cyclical market that is currently being impacted

heavily by the slowdown of the Chinese economy and the overall

drop in commodities prices around the globe. We believe that

Alcoa’s strong international presence and strength in vertical

integration will allow them to sustain a competitive advantage in

the future, which will make it likely for them to return to

previously seen equity prices in the future.

Economic Analysis

United States Economic Analysis

Real Gross Domestic Product (GDP)

Real GDP, which is the value of goods and services produced in

the U.S., increased at an annual rate of 1.5 percent in the third

quarter of 2015, following a 3.9 percent increase in the second

quarter. Each quarter, three estimates are released; the most

recent estimate (first of Q3), as of October 29th, signaled that the

increase in the 3rd quarter is primarily due to a downturn in private

inventory investment and decelerations in exports, in

nonresidential fixed investment, in PCE, in state and local

government spending, and in residential fixed investment that

were partially offset by a deceleration in imports.1

The current-dollar GDP (market value of goods & services less

the goods & services used in production) increased 2.7 percent to

$18,034.8 billion (versus a 6.1 percent increase in Q2 2015).1 The

slowing increase in GDP can be significantly attributed to the

economic slowdown in China that is impacting U.S. exports and

Chinese imports. As you can see below, Real GDP increased two

percent Year-over-Year from 3rd Quarter 2015.2

We predict that Real GDP over the next quarter will increase

approximately 2.7 percent, which we attribute to the

strengthening U.S. Dollar in international markets, and we expect

to see an increased demand in U.S. goods & services while China

is in their slowdown. Year over year, we expect Real GDP to

increase between 3-3.5 percent. The second estimate of Real GDP

will be announced on November 24th, 2015.

Commodities Prices

Across the board, we are seeing a drop in commodities prices.

With Copper Futures at their lowest trading price in six years at

$2.17 spot per pound, Crude Oil down from September at

$41.74/barrel, gold at its lowest in five years at $1083, and

aluminum futures at $1494 per metric ton.3

Below, you can see the variation of individual commodity groups

versus the total Commodity Price Index. Historically, Metals

prices are equal or above the Commodity Price Index line, while

Energy is more volatile to economic conditions. Currently, oil is

trading near its six year lows, driving Energy below the

Commodity Price Index, while Metals are still above the index

line, but we are seeing a rapid decrease from their peak in 2011.4

Source: Index Mundi

Driven by China’s previous focus on investment spending,

commodities were previously at a large demand, but due to the

shift away from construction and heavy industry in China,

demand for commodities have dropped, increasing surplus

inventories, and driving prices down as well.

These adjustments have heavily impacted companies like Alcoa,

who is one of the leading exporters in aluminum. In order to

combat the lower demand, companies like Alcoa have begun

reducing their capacity in order to cut costs. We believe this will

allow them to combat the declining demand, and will help drive

prices for these commodities back up to regular levels in the next

year.

Consumer Confidence

With light vehicle sales surging in recent months, reflecting the

decline in gas prices, we are starting to see a return of consumer

confidence with regards to purchasing. Housing has been slower

to recover than vehicle sales, but with the continued tightening in

the labor market should push housing up going forward.15 Since

consumer sentiment increased to 93.1 in November, which beat

market expectations, we are seeing that consumers are more

optimistic over current and future conditions of the economy.5

Some speculation over general consumer confidence has been

discussed, due to the U.S. drop in CCI by 5.0 pts in October from

September, which had seen a moderate increase. Currently, the

CCI stands at 97.6, which is based on 1985 being 100, and is down

from 102.6 in September.

Consumers’ optimism regarding short-term outlooks were less

positive in October than September, with 18.1 percent of


consumers expecting business conditions to improve over the next

six months, while consumers who are expecting business

conditions to worsen increased by 0.2 percent to 10.6 percent.6

We believe this is partially driven by the slowdown of the China’s

economy, and the impact this has had on commodities prices.

Additionally, with the announcement of the Energy and Materials

sector damaging EPS growth in the 3rd quarter 2015 (GEPS: -17.0

percent, GEPS less Energy and Materials: 2.0 percent), there is a

fear regarding corporate and business performance in 2015.

These figures, however, are heavily influenced by the

strengthening U.S. Dollar in comparison to international markets,

which drove only 35 percent of companies to beat revenue

estimates in the 3rd quarter. 7

Exchange Rates (FX)

Exchange rates are an economic indicator of strength of an

individual currency in retrospect to another currency, and is useful

because it illustrates the economic opportunities that consumers

and investors would have by converting their wealth to another

currency in comparison with their current opportunity. As you

can see below, with the total value of world trade estimated to be

$24.8 trillion this year, and a forecasted value of $28.7 by 2020,

the strength of U.S. Currency versus Japan (122.54 Yen/USD) ,

China (6.41 Yuan/USD) and the Euro (1.07 USD/Euro) will affect

the U.S. economy.8

Source: IBISW orld

China

The U.S. Dollar has strengthened significantly against the

Chinese Yuan over the past 5 years, primarily driven recently by

the slowdown of the Chinese economy. The increase value in

USD has hurt U.S. businesses that export to China, since the

buying power of the Chinese Yuan has decreased due to the

slowdown. This has hurt materials companies like Alcoa, since

they rely heavily on exports to China, and we predict that this

issue will continue to impact companies in this sector for the next

few years.

Japan

The Japanese Yen is also relatively weak compared to the USD

currently, which is exchanging around 122 Yen/USD. The Yen’s

strongest position against the USD in the last 5 years was in

October 2011, and the current growth of the USD in FY15 could

show a strengthening of the U.S. economy, and a positive sign for

investors in the short-term.9

Euro

The USD is predicted to continue to strengthen against the Euro

due to deteriorating concerns regarding Greece and the decision

not to remove them from the Eurozone. This has softened

inflation partially due to the drop in global oil prices and weaker

trends in commodity and food costs. Eurozone is predicted to

effectively level with USD at a 1.00 exchange rate by Q4 2016,

according to ScotiaBank. We predict a slower drop in USD

against the Euro, which will have a minimal impact on the

Materials industry, since a majority of exports in this sector are to

China and not the Eurozone.10

Interest Rates

Interest rates affect companies’ cost of capital by raising or

lowering the cost of borrowing, and also influence Capital

Expenditure and Mergers & Acquisitions activity, in turn

affecting the profitability of the companies. Historically, higher

interest rates tend to slow down the economy and decrease

demand for industrial products, while lower interest rates

stimulate the economy.

Following the hawkish tone of the U.S. Federal Reserve’s meeting

in October, we believe that they will increase both short-term and

long-term Federal Funds rates in December 2015. Historically ,

the short-term yield rate is expected to increase more than the

long-term yield rate, since the short-term rate is more driven by a

country’s Central Bank, while the long-term rate is generally

influenced by more international factors. This will level the

projected yield curve, flattening the variance between short-term

and long-term bond yields.

As the following graph demonstrates, we are currently at a

historically low Federal Funds Rate. The rate was lowered by the

Federal Reserve in order to combat the recession and financial

crisis of 2009, however we are starting to see economic

improvement since 2009, leading the Federal Reserve to consider

raising the rates.11

The largest concern with this adjustment is the current inflationary

rate, since many analysts are concerned that we are

underestimating the current rate of inflation, and the Federal

Reserve will need to take that into account come December.

Currently, inflation is assumed at a zero percent, suggesting no

change in inflation for one year from September 2014 to 2015. 12

If inflation is higher than estimated, the Federal Reserve will have

to take that into account in their new interest rate. According to

Janet Yellen, the Federal Reserve would like to see inflation

http://marketrealist.com/2015/11/interest-rates-rise-asset-class-performance/?utm_source=yahoo&utm_medium=feed&utm_content=graph-1&utm_campaign=interest-rates-rise-asset-class-performance#811191


moving toward the annual two percent target before raising

rates.13

If the Federal Reserve decides to increase interest rates in

December, it will cause increased volatility in the equity markets,

however after 2-3 months we believe the markets will return to

current levels on an uphill slope. With the last three rate hike

cycles, equity prices have fallen when the Federal Reserve

increased rates, yet in following months equity prices move higher

as the better economic data is processed by the markets.15

The Fixed Assets market will be more heavily influenced by the

change, and have already began to reflect a higher yield demand

for both short-term and long-term bonds. Historically, the Federal

Reserve’s increase leads to higher short-term bond yield, due to

investors selling them in anticipation of the Federal Reserve rate

hike.

Unemployment

On a macroeconomic scale, U.S. unemployment numbers appear

favorable in the short term. Unemployment has steadily

decreased over the last nine quarters, and currently sits at 5.0

percent.14 This 5.0 percent compares favorably with the average

over the past 15 years of 6.1 percent, which captures recessions

beginning in 2001 and 2008.15 Over the last year, unemployment

has remained relatively unchanged, with a decrease of only 0.7

percent from October 2014.

For the time being, we do not predict any change in the

unemployment rate in the United States, however there is the

opportunity for unemployment to rise in the future. Traditionally ,

unemployment is a lagging indicator of the economy, so we can

expect to see an increase in unemployment if we see the economy

improving. The cyclicality of this issue is that if unemployment

rises, more people will theoretically apply for unemployment

benefits, raising tax rates to compensate for these individuals, and

an increase in taxes leads to less disposable income, both of which

draw money out of the economy.

However, as aforementioned, we do not believe there will be an

immediate change in unemployment, and the above concerns

address a further outlook on the economy.

International Markets Economic Analysis

China

The current economic slowdown occurring in China has impacted

the global economy. The transition from a manufacturing and

industrial centered economy to a consumer-focused one has led to

a decrease in imports of commodities and industrial materials. The

decrease in commodities imports by China is effecting the various

emerging markets around the world, including Brazil and Russia,

who specialize in mining exports. The recent slowdown in

China’s GDP growth has caught up with this industry, after

several years of capacity growth in order to fill China’s

historically growing demand for commodities since 2000.23 In

order to combat the lower demand for aluminum, China has

imposed a 15 percent duty rate on exports of aluminum ingots,

which they believe will help prevent economic turmoil in these

emerging markets, and force more Chinese producers to keep their

business within China, reducing supply to the rest of the markets

from China.16

Additionally, the slowdown is effecting the emerging markets in

Korea, Taiwan and Singapore, who are heavily technology

focused and thrive off of Chinese manufacturing. Analysts at JP

Morgan believe that the build-up is slowing down, which presents

a positive outlook for the Chinese economy in upcoming years.17

With regards to the United States Equity market, China’s change

will not likely effect the US economy as much as some would

think, since the United States only accounts for about 1% of

China’s imports. Likewise, the European markets only account

for 1.5 percent of Chinese imports, so there will not be much of

an effect on those markets by the slowdown as well.

The Central Bank of China has yet to utilize monetary policy to

soften the impact of their slowdown. They have yet to lower

interest rates and bank reserve requirements, which would

stimulate lending in China; however it does not seem likely that

they will be using it given their recently announced 5-year plan to

stabilize growth.

Eurozone

The Eurozone is finally seeing recovery from complications with

Greece earlier this year. Demand for housing and commercial

building loans have increased in recent months, signaling an

increased consumer confidence.

The Bank of England has taken a dovish approach to changing

interest rates, which signals their belief that they have not

completely recovered from economic turmoil. However, this will

benefit the United States because the Federal Reserve typically

will not increase interest rates if other countries are adjusting

theirs as well.18

Capital Markets Outlook

Based on the previously discussed economic factors, we believe

that the materials sector will continue to decline in the short-term,

based on pressure from China and slowing manufacturing in the

emerging markets affected by China. However, we believe that

U.S. Markets and the Eurozone will see growth in these sectors

within the next 2-3 years, due to the growth of construction in

Europe, and the increasing demand for consumer products in the

United States. Additionally, the markets are expected to see

significant volatility following an increase in the Federal Funds

Rate, which will exaggerate the short-term volatility of returns in

this sector.

Given our long-term investment beliefs that the U.S. economy

will continue to improve, and there will be eventual growth in the

Chinese economy, we recommend holding AA, since this sector

will recover and begin to perform well in comparison to the rest

of the equities market.

Industry Analysis

Industry Overview

The Basic Materials sector us a category of stocks that are

involved in the discovery, development, and processing of raw


materials. 19 This sector can be divided into various subsectors

according to the S&P Global Industry Classification Standard

(GICS)20:

Chemicals – Commodity Chemicals, Diversified

Chemicals, Fertilizers & Agricultural Chemicals ,

Industrial Gases, Specialty Chemicals

Construction Materials – Construction Materials

Containers & Packaging – Metal & Glass Containers,

Paper Packaging

Metals & Mining - Aluminum, Diversified Metals &

Mining, Gold, Precious Metals & Minerals, Steel

Paper & Forest Products – Forest Products, Paper

Products

Alcoa falls under the Metals & Mining industry of the Basic

Materials sector. The Basic Materials sector as a whole has a

market cap of $1.42 trillion, with YTD growth of -13.87 percent.

With a focus on the Metals & Mining industry specifically, there

is a market cap of $396.56 billion and YTD growth of -46.46

percent. Compared to Alcoa specifically, Alcoa has YTD percent

growth change of -49.69 percent, which can be seen below.21

Source: Yahoo! Finance

The chart above shows a comparison between the S&P 500,

Alcoa, and the Materials Select Sector ETF (XLB), which

currently holds 28 of the leading Basic Materials Sector

companies.22 XLB represents the overall condition of the Basic

Materials sector, and we believe it is a good indicator of this

sectors current condition. In the above chart, we can see that

Alcoa is currently seeing a much lower return than the XLB

baseline, with XLB having a YTD growth of -8.74 percent. The

industry’s cyclicality can be seen in this chart by comparing XLB

with the S&P 500, where XLB’s volatility can be seen with its

change around the S&P 500.

As shown below, the S&P also has holdings in the Materials

Sector, which are showing YTD returns of -7.09 percent, versus

the S&P 500’s return of 0.06 percent YTD. The Metals &

Mining’s industry is highly consolidated in the S&P, with only

four companies being held by the index.23 Over the last 10 years,

the S&P Materials sector tends to outperform the S&P as a whole,

however, the S&P’s 10 year return is greater than the Materials

sector, with 7.31 percent and 7.08 percent respectively.24

Source: US Spindices

Sub-Industry Analysis

With regards to Alcoa, we are focusing heavily on the

Aluminum subindustry of the Metals & Mining industry, given

that Alcoa’s operations and revenues are heavily driven by

global demand for aluminum. This subindustry has a market cap

of $97.6 billion, with YTD percent change of -38.04 percent.25

The Aluminum subindustry includes companies engaged in

mining and beneficiation of bauxite, as well as the smelting,

refining, and processing of alumina and aluminum alloys. The

industry also covers recycling of these materials, but excludes

wires, springs, industrial components, and aluminum siding,

which fall into other subindustries of the Basic Materials or

Industrial Goods sectors.

Industry Trends & Developments

Steel and aluminum are the two leading metal groups in the

United States, yet the manufacturing for both are significantly

different. In the first two quarters of 2015, Alcoa accounted for

approximately six percent of the world’s primary aluminum

production, while for steel, the two leading companies in North

America only accounted for less than two percent of global steel

output. Both subindustries face strong international competition

from producers, and are constantly battling with overcapacity and

surpluses in the market.24

International competition is a significant factor for Aluminum

manufactures, since these companies have always had to rely on

international companies to acquire raw materials. Alcoa in 2014

attributed 49.4 percent of revenues to operations outside the

United States. The world production of refined aluminum has

historically seen growth from 2010 through 2013, yet has seen a -

14.05 percent decrease in 2014 due to reduced production in

China, Russia and the United States. Likewise, consumption

growth has decreased significantly around the world, with 2014

world consumption growth down to 11.85 percent from 2013

consumption.


Source: W orld Bureau of Metal Statistics

As seen above graphs, the US production of refined aluminum

saw tremendous growth in 2010 following the financial crisis (207

percent), yet the majority of the world has remained fairly well

correlated with one another. Global demand for production has

decreased from 2013 to 2014, primarily due to the decrease in

consumption demand in China, and the reduction in capacity in

the United States and China.

Source: W orld Bureau of Metal Statistics

Focusing on consumption, there is very little correlation between

growth rates historically. Using the World Total as a baseline, we

see that Russia demand grows significantly less than the base,

while Chinese demand historically grew higher than the base,

which explains why their slowdown has significantly impacted

the commodities markets. We can also see that China has been

historically responsible for approximately 43 percent of world

global consumption of aluminum, based on the past 5 years. This

explains why their -11.6 percent growth in 2014 has substantially

impacted the commodities market.25

The supply and demand for aluminum will be heavily impacted

by China’s economy, which will determine whether the market

surplus will contract or expand. China’s production in 2014

accounted for 49.4 percent of global refined aluminum output.

China’s aluminum industry will drive the conditions in the

aluminum industry throughout the next few years, as the global

industry continues to become significantly condensed. The

demand for aluminum is cyclical in nature, and is highly sensitive

to the overall direction of the economy. Aluminum revenues will

be highly influenced by consumer demand, since aluminum

consuming companies generally rely on demand for construction

materials and consumer products (appliances, cars, containers,

etc.) to determine inputs .24

Porter’s 5 Forces

1) Industry Competition: The aluminum subindustry is

extremely dependent on international demand and general market

volatility, leading companies to continually expand and reduce

capacity through mergers and plant closures. Since aluminum

prices are driven by global demand, when the prices are low firms

tend to reduce capacity in order to decrease the global supply and

prevent a surplus, which in turn drives price for these

commodities back up. The market is heavily dependent on price

for aluminum on a global scale, and companies do not have much

control over pricing outside, since global competitors will have

relatively equal pricing.

2) Threat of New Entrants: The aluminum subindustry is

dominated by large conglomerate corporations, like Alcoa, that

utilize vertical integration to control the refinement process from

mining through smelting. Additionally, many of these companies

engage in engineering and product development as a part of their

vertically integrated operations . The extent of their business

operations will make it difficult for other firms to become

substantial competitors.

Right now, there is a low risk for new entrants, since the

profitability of the industry is low, reducing incentives for

investors. It is also hard to enter the engineered products side of

the industry, since there are existing patents for a majority of the

products, and strategic partnerships between existing companies

and their business-to-business customers.

3) Threat of Substitute Products: There are minimal substitute

products for aluminum, since the products that use aluminum

primarily use it for its low-cost, light weight and high durability.

Alternative products would mostly be steel and its alloys, which

could replace aluminum in some manufacturing aspects; however

we are seeing a transition from steel to aluminum alloys used in

manufacturing, due to the benefits discussed above.

4) Bargaining Power of Suppliers: This firm is generally not

driven by supplier bargaining power, since the majority of firms

are vertically integrated, and engage in the mining and smelting

themselves. The largest factors would be labor unions, such as the

International Federation of Chemical, Energy, Mine and General


Workers’ Unions and the International Union of Mine, Mill and

Smelter Workers. These unions impact the labor supply to firms ,

which is a substantial input for aluminum industry.

5) Bargaining Power of Buyers: The market outputs of this

industry discusses the ability of customers to put the firm under

pressure, given demand for aluminum. As discussed throughout

this report, the bargaining power of buyers is driving the price of

aluminum currently, since there is less demand and total trades

than we have historically seen. With regards to bargaining, firms

compete for low costs and strategic partnerships, but the

performance and qualities of the refined alloys and alumina are

what drive buyer demand. Firms rely on strategic partnerships,

such as the Ford and Alcoa partnership on the 2016 Ford F-150,

to drive a significant portion of revenues, which forces the

majority of firms to compete for strategic partnerships with

consumer businesses.

Company Analysis

Alcoa is a global leader in lightweight metals engineering and

manufacturing. Alcoa’s innovative, multi-material products,

which include aluminum, titanium, and nickel, are used

worldwide in aircraft, automobiles, commercial transportation,

packaging, building and construction, oil and gas, defense,

consumer electronics, and industrial applications. Founded in

1888 in Pittsburgh, PA, Alcoa currently is headquartered in New

York, NY with international operations in 30 countries (mainly

U.S. and Europe). 1

In 2014, Alcoa’s business was distributed in Global Ro lled

Products, Primary Metals, Engineered Products & Solutions,

Alumina, and Other. The breakdown of sales per segment is below

(2014 Sales: $23.9 Billion).

Source: Alcoa.com

Company Overview

Alcoa maintains a firm grasp on the aluminum industry by being

extremely flexible to aluminum pricing in their upstream

operations (mining), and extremely innovative in their midstream

(smelting & refinement) and downstream (engineered products)

operations. They possess the ability to tune plant production based

on pricing of primary aluminum. In their midstream and

downstream operations, Alcoa has developed products and

relationships that create a dominate footprint for them in the

space. For example, new high-strength, aluminum-bodied

automobiles manufactured by Ford will only increase the demand

for a partnership with a major producer like Alcoa.

Sales for FY 2014 totaled $23.9 billion, a 3.7 percent increase

from the previous year. As of November 13th, 2015 AA is trading

at $7.99 per share, with a 52 week low of $7.81 and a 52 week

high of $17.75. In FY 2014, they operated at a roughly $1 billion

profit, a $2.4 billion swing from the previous year in which they

experienced a $1.4 billion loss in operating profit. Alcoa also

possesses low leverage, with their 41 percent debt level falling

below most competitors.

Internationally, Alcoa generates 50.6 percent of revenue in the

United States, 24.3 percent in Europe, 12.7 percent in Australia,

8.5 percent in Emerging Markets (Brazil and Russia), 1.7 percent

in China, and 2.1 percent in other geographic regions. As you can

see below, Alcoa’s China and Brazil revenues have increased

from 2013 to 2014, while Russia decreased slightly.

Source: Bloomberg

In 2014, Alcoa attributed 52.9 percent of sales to commodity -

driven operations (primary metals & aluminum) and 47.1 percent

of sales attributed to value-added products. Compared to

historical averages, Alcoa is basing a larger focus of operations in

their Global Rolled and Engineered Products & Solutions

segments, and are decreasing the impact of their Alumina and

Primary Metals effect on revenues.

Business Segments

Alcoa divides its business into four main segments: Alumina,

Primary Metals, Global Rolled Products, and Engineered

Products and Solutions, and each cater to a different customer

base. These segments account for 17.89 percent, 34.88 percent,

26.24 percent, and 20.91 percent of total revenue, respectively.26

Alumina

Alumina and Primary Metals supply aluminum and other metals

in their raw, most basic form, as well as more refined forms. These

segments operate basically as a commodity business, and the price

of aluminum is determined based on the alumina price index

(API).

Historically, we’ve seen extreme volatility in alumina growth

rates. From 2011 to 2012, we saw a change of -12.72 percent,

followed by a positive growth of 2.94 percent from 2012-2013,

will final growth going into 2014 at -2.00 percent. This volatility

is based on the aforementioned cyclical nature of the commodities

market, specifically aluminum, and the ongoing struggle for

balance between capacity and demand.

We forecast a growth in alumina revenue of -2.00 percent in 2015,

-1.00 percent in 2016, 0.00 percent in 2017, and then an increase

in revenue of 0.50 to 2.0 percent annually throughout the end of

the forecast period. We forecast this because we feel that the

slowdown in China will continue to deteriorate alumina

production by Alcoa, but we expect a return to positive growth in


three to four years, once the Chinese economy slowdown becomes

more stabilized and general commodity prices begin to increase

across the board.

Primary Metals

Alcoa’s upstream operations also include their Primary Metals

fabrication, where they utilize their worldwide smelter system.

Primary Metals are responsible for refining aluminum from the

alumina generated in the Alumina segment, and then selling this

aluminum to traders, manufacturers, or holding onto it for use in

their Global Rolled or Engineered Products & Solutions

segments. In 2014, the sale of primary aluminum produced by the

Primary Metals segment accounted for 90 percent of the segments

revenue.26

We forecast that Primary Metals growth rate will be -1.00 precent

in 2015, followed by a positive growth rate of 2.00 percent in

2016, 3.00 percent in 2017, 3.50 percent in 2018, and 4.00 and

5.00 percent thereafter. We forecasted these rates because, like

the Alumina segment, we believe that the Chinese economic

slowdown will negatively impact Alcoa’s Primary Metal

operations, but we will see a quicker recovery in this segment due

to existing surpluses of aluminum in the market.

Global Rolled Products

The Global Rolled Products operations convert primary

aluminum into metal sheets, which are then used in packaging,

automobiles, and the aerospace industry. These sheets are used in

the production of aerospace and automotive products, brazing,

commercial transportation, and construction. This segment is also

is responsible for rigid container sheets, which are sold to

customers in the packaging and consumer markets. Making up 26

percent of Alcoa’s total revenue, Global Rolled Products are the

largest revenue segment of the value-added products segment.

This segment has undergone the most drastic change in demand,

as aluminum is has high potential to be the material of choice in

vehicle frames. Alcoa recently developed a more high-strength

aluminum sheet, and is contracted with Ford to supply the

material to a new line of trucks.

We forecast that Global Rolled Products will increase at a growth

rate of 5.00 percent through 2018, based on management notes in

the 2015 3rd Quarter 10-Q, and then will slow to 3.45 percent from

2019 until the end of the forecast period. The expectations for

positive growth are based on the increased demand for sheet

aluminum in the aerospace industry for ongoing repairs, and

automotive manufacturing with the strategic partnership with

Ford.

Engineered Products & Solutions

Engineered Products and Solutions represents the furthest extent

of Alcoa’s downstream operations, and includes titanium, super

alloy investment, and aluminum castings. This segment works

closely with customers to develop a product that will fit their

needs. These products include parts for jet engines, fasteners , and

commercial vehicle wheels. Alcoa’s engineered products and

solutions also benefit their operations by creating intangible

assets, such as their patent on the reclosable aluminum bottle they

designed for Anheuser-Busch’s Bud Light beer. They utilize their

innovation, technology, and full product support in order to bring

differentiated products to the market for their various partners.27

Alcoa is viewed as a global leader in power and propulsion,

forgings and extrusions, fastening systems, building and

construction systems, and wheels and transportation products.

This large footprint, coupled with the fact that Alcoa generates 21

percent of their revenue through their Engineered Products and

Solutions segment, means that Alcoa must do very little to market

themselves. They have a well-established brand across many

different industries, and customers will seek them out to take

advantage of their broad exposure and resources .28 Large

customers include Ford, Boeing, and United Technologies Corp.

We forecast that Engineered Products & Solutions will grow at

5.00 percent in 2015, 32.37 percent in 2016, 13.48 percent in

2017, 10.03 percent in 2018, 9.39 percent in 2019, and then 3.00

percent from 2020 on. We feel that they will achieve these growth

numbers due to a strong ongoing partnership with Ford, as well as

their plan to segment their value-added operations into a separate

entity at the end of 2016, which will allow them to focus on their

lean engineered products for their various customers. The high

growth in 2016 is attributed toward Alcoa’s predicted increases in

Aerospace & Defense sector revenue, attributed to their

downstream acquisitions of TITAL and Firth Rixson.

Financial Analysis of Earnings Releases

Corporate Results in 3rd Quarter 2015

With the publication of Alcoa’s 3rd Quarter 10-Q, total sales were

at $6459 million, with Alumina, Primary Metals, Global Rolled

Products and Engineered Products & Solutions being responsible

for $1303 million, $1728 million, $1556 million and $1397

million, respectively. Compared to 2014, Alcoa’s 3rd quarter is

down 13.14 percent in total revenue, with no segments generating

more revenue than 3rd quarter 2014. The comparison of revenue

segment as a percent of total revenue for the 3rd quarter is shown

below.

Source: Alcoa 10-Q

Looking at YTD performance through the end of the 3rd quarter

over the past 3 years, we notice that Alumina sales have increased

by 9.53 percent from 2014 to 2015, while total revenue has

decreased by 3.39 percent. From 2013 to 2014, we saw the

opposite effects on segment revenues, with Alumina decreasing

by 11.69 percent, and Primary Metals and Engineered Products &

Solutions increasing by 0.81 percent and 2.59 percent

respectively. These comparisons are shown below.


Source: Alcoa 10-Q

Alumina Revenues

Sales revenues in 2015 have seen growth in the Alumina sector to

date, which is attributed to increased third-party sales, and a

decrease in intersegment sales. Third-party sales accounted for

67.3 percent of Alumina revenue, which is almost equal to the

2014 proportion of 67.5 percent of Alumina sales being third-

party sales. The growth in Alumina sales in 2015 helped offset

the decrease in sales for Primary Metals, Global Rolled Products

and Engineered Products & Solutions.29

Given our forecasted revenue of $23.57 billion in 2015, we

attributed 18.29 percent of total revenue to Alumina based on

historical averages. We feel that for the short-term, Alcoa will

still need to rely on Alumina production in order to maintain

steady revenues, but we feel that by the end of our forecast period,

Alumina will only account for approximately 13.73 percent of

revenues.

Primary Metals Revenues

Sales for Primary Metals are largely driven by third-party sales,

with 2015 and 2014 percentage of total Primary Metal sales

attributed to third-party sales being 71.2 percent and 69.4 percent

respectively. The decline of total revenue allocated to Primary

Metals from 33.88 percent to 33.00 percent signals the weakening

of Alcoa’s upstream operations, partially driven by the slowdown

in China’s economy.30

We forecasted that Primary Metals will continue to account for

33.00 percent of revenues, based on historical averages; however,

like Alumina, we predict this to decrease as we head toward our

CV year, with an ending total revenue percent of 30.41 percent.

Our decision to decrease these over time is due to Alcoa’s plan to

separate their upstream and downstream operations in the end of

2016, and we felt that the downstream operations would provide

more value-add for the organization than the upstream operations.

Global Rolled Products Revenues

Global Rolled Product sales are almost entirely driven by third-

party sales, 98 percent of sales in 2015 and 97.5 percent of sales

in 2014. This segment will be heavily influenced by changes in

the economy, which we see by the decrease in growth for total

revenue for this segment from 2014 to 2015 at -21.33 percent. We

attribute this change to China’s economy as well, given the

previously high level of demand from China for sheet aluminum

used in manufacturing.30

Alcoa’s Global Rolled Products are expected to account for 27.10

percent of total revenue in 2015, based on historical averages,

given that we believe this segment of the business, as well as the

Engineered Products & Solutions, will continue to operate

relatively profitably during China’s economic slowdown. We

forecast that by the end of our model that Engineered Products &

Solutions will outweigh Global Rolled Products in revenue

percentage, and Global Rolled Products will account for 25.54

percent of total revenue.

Engineered Products & Solutions Revenues

Engineered Products & Solutions are entirely attributed to third-

party sales. This is because Alcoa does not use their own

engineered products, as these are individual products that solve

the needs of an external organization. Growth for revenue in this

segment is down 6.56 percent from 2014, signaling a decreased

demand for these types of solutions by companies.30

We believe that this segment will see positive growth in 2015,

mainly attributed to Alcoa’s deals with Ford and their acquisitions

of various aerospace companies during 2014 and 2015. These

companies will add value to Alcoa’s engineered products

segments. This segment is forecasted to account for 21.60 percent

of Alcoa’s total revenue in 2015, and forecasted to account for

30.33 percent of total revenue by 2022. We believe that Alcoa

has recognized the profitability of this segment, and will be

working to expand capability and operations within Engineered

Products & Solutions, especially following their separation of

upstream and downstream operations in 2016.

The graph below shows how each segment comprised total

revenue over the past three years, and includes our 2015 predicted

revenue breakdown.

Source: Alcoa Equity Valuation

Managerial Guidance

In 2014, growth in global aluminum demand reached 7 percent,

which was consistent with management’s projection at the end of

2013. The refining portion of the upstream operations continued

to make progress in shifting customer pricing away from the LME

aluminum price to a mixture of alumina pricing index and spot

pricing. Additionally, the midstream and downstream operations

continued to grow revenue through innovations and share gains.

To address a global excess supply of aluminum, large amounts of

smelting and sheet capacity were closed as management

continued to grow Alcoa’s presence in downstream operations. In

2014, management projected continued growth (increase of 7

percent) in the global consumption of primary aluminum,

consistent with that of the last three years, led by China at an

estimated 10 percent. However, since that estimation was at the

end of 2014, and the Chinese economy has experienced a more


significant slowdown since that point in time, we believe that their

consumption of primary aluminum will be lower than 10 percent

in 2015.

All other regions in the world are expected to have positive

growth in aluminum demand following 2015, including North

America at an estimated 5 percent. Aerospace is expected to be

driven by large commercial aircraft due to an eight-year order

backlog, as well as strength in orders for regional jets. For

automotive, growth is anticipated in both the United States, due

to the replacement of older vehicles, low borrowing rates, and the

decline in gasoline prices, and China, due to new clean air

legislation and a continued increase in the percentage of the

population driving automobiles .26

Competition

The following data reflects competitors of Alcoa within the Basic

Materials Sector, with companies also in the Industrial Goods

Sector, since Alcoa also has holdings and interests in the

Automotive and Aerospace & Defense Sectors.

Source: Yahoo! Finance & Reuters

Comparing market capitalization across these competitors, there

is a large variance in the each business’s size. Market

capitalization will vary between competitors due to variety and

types of products that are offered by firms, with companies such

as X focused more on steel production, while KALU, CCK and

ACH are all global competitors of Alcoa on aluminum refinement .

Comparing P/E ratios across firms, we see that Alcoa sits

relatively in the middle of CCK and KALU, with CENX being an

outlier from the group. Compared to XLB, which we are using as

the industry benchmark, AA is below XLB.

ACH, CCK and X all have higher D/E ratios than AA. Compared

to the industry benchmark, AA is only slightly above XLB,

showing that it is holding a balance of debt to equity relatively

similar to what the industry is expected to have. Since AA’s D/E

is lower than a majority of its competitions, we can assume that

they are more efficient at leveraging engagements in acquiring

additional product lines and other businesses.

ACH, KALU and X all have negative ROE percentages, signaling

that these firms had a negative Net Income, although this does not

necessarily indicate that they are poor investments. AA’s ROE is

6.198 percent, which in comparison the industry benchmark of

21.71 percent, we are seeing a lesser ability to generate returns on

Total Shareholders’ Equity by Net Income. CENX is performing

fairly closely to the industry ROE, with only a 7 percent difference

between their ROE and the industry standard. AA’s ROE is

currently under the industry standard, but given their market

capitalization and comparable D/E to the industry, AA is

performing relatively closely with the industry as a whole.

Catalysts for Growth

Cyclical Market Nature

Historically, the commodities and basic materials market has been

known to be extensively cyclical. With the current position of

commodities at their relatively lowest point over the past 5 years,

there is a possibility that commodity prices could reverse direction

in the next year. The recovery of aluminum would be driven by a

recovery of the Chinese economy or an increased demand for

consumer goods in the United States, which we expect to occur in

the next two to three years. The volatility of aluminum prices can

be seen in the graph below, which examines the historical five

year monthly price of aluminum per metric ton.

Source: W orld Bank

Regulation/Policy Change

Government regulations and potential for changes in policy could

directly or indirectly affect the business activities of Alcoa. While

positive regulation changes would accelerate Alcoa’s growth,

negative changes would hinder Alcoa’s growth potential.

SWOT Analysis

Strengths

Diversified End Markets

With holdings, operations, and transactions in 30 countries, Alcoa

presents itself with the potential to maintain economic stability as

various markets fluctuate in upcoming years. With volatility for

the Chinese Yuan and Euro in recent months, this diversified

stability could help them maintain or improve operations in other

countries. They hedge the risk with foreign exchange by utilizing

forward contracts.26

Vertical Integration

Alcoa currently has acquired various aerospace businesses, as

well as mining and other fabrication companies. Alcoa has

recently acquired Firth Rixson, a global leader in aerospace jet

engine components, in 2014 for $2.85 billion, which was expected

to add $1.6 billion to revenues by 2016, and increase revenues by

$2 billion by 2019. Alcoa has also acquired TITAL in 2015, for

$204 million. TITAL, an aerospace components company, is

expected to grow titanium revenues by 70 percent over the next

five years, and almost 70 percent of their revenues are expected

to come from commercial aerospace sales in 2019.

These acquisitions are increasing Alcoa’s presence in the

aerospace segment, an effort on Alcoa’s part to attempt to

diversify their higher-margin operations, and are providing more

strength to their Engineered Products & Solutions segment.30

Ticker Market Cap P/E 15 D/E ROE AA 10.57 B 14.7 .63 6.198%

ACH 5.03 B N/A 2.41 -25.56%

CENX 489.25 M 3.61 .23 14.35%

CCK 7.00 B 14.0 13.42 83.79%

KALU 1.45 B 18.2 .28 -25.02%

X 1.43 B N/A 1.09 -6.58%

XLB 25.44 B 17.0 .60 21.71%


Weaknesses

Fiscal Expectations v. Performance

Q3 2015 failed to meet estimates with fiscal reports, which was

not a shock to investors following Alcoa’s numerous negative

revisions to estimates in the last weeks prior to the release of the

reports. Following the release of 3rd quarter earnings, Alcoa’s

shares declined 4 percent, and we fear that a poor Q4 earnings

could lead the equity price to plummet again. 31

Overall Production

Alcoa has had to reduce overall production in response to the

worsening aluminum-commodities markets, with an emphasis on

smelting and alumina refining capacities. Alcoa, rather than

reducing operations, has sold off operations to various companies

in order to generate more capital for future investment, and

potential further investments into aerospace and automotive

manufacturing. On November 2nd, Alcoa announced that it will

be reducing 503 thousand metric tons of aluminum smelting

capacity and aluminum refining capacity by 1.2 million metric

tons. These reductions will begin in Q4 2015, and will be

completed by Q1 2016. 32

The reduction will further improve the cost position of Alcoa’s

upstream operations and enhance their competitive pricing

position, as they have continued to reshape their upstream

portfolio as a low-cost global leader in alumina and aluminum

production.32

Opportunities

Aerospace & Defense Industry

Airline companies can either order aircraft to increase capacity or

to replace aircraft in existing fleets. The replacement demand is

largely driven by crude oil prices. Newer aircraft have much

higher fuel efficiency than the older fleet. According to Market

Realist, almost half of orders placed by airlines are for

replacement.29

Alcoa also acquired Firth Rixson in November 2014 and TITAL

in March 2015, which are both global leaders in the aerospace jet

engine components. These acquisition strengthened Alcoa’s

aerospace portfolio, and will continue to provide positive benefit

to Alcoa’s portfolio in the Aerospace & Defense Industry.29

Automotive Industry

Alcoa has just announced a deal with Ford (NYSE: F) to develop

and apply a new aluminum alloy, which will make Ford the first

automaker to implement the alloy in cars and trucks. This alloy

is said to be stronger and lighter than automotive-grade high-

strength steel, and has a greater formability than the current

industrial standard. This alloy will ultimately replace steel and

aluminum in the current automobile manufacturing process for

Ford, with the first implementation with Ford’s F-150 model of

pickup trucks.33

Ford does not have exclusive rights to this alloy at the time, which

help Alcoa to achieve their goal to grow their automotive-

aluminum sheet business to $1.3 billion in 2018 (41.52 percent

annual growth from 2013). 34

Consumer Electronics

As demand continues to skyrocket for consumer electronics,

Alcoa can continually develop and maintain market share in

aerospace-grade aluminum on mobile devices and other leading

quality materials, and continue to make thinner, lighter and more

durable products.35

Energy Optimization

Alcoa has the ability to seek opportunities to lower energy costs,

since aluminum production is heavily energy intensive. Alcoa has

already executed this for one of its smelters, following their

realized productivity-related gains of $201 million (2013-14).26

Oil Costs

Crude Oil (NYMEX) continued to drop from July into late

August, before a spike in September, and volatility of price

between $40 and $45 a barrel since September. With current

position at $41.67 a barrel and Alcoa’s reliance on airlines

continually replacing old aircraft, the lower price of crude oil may

lead airlines to find more economical ways to operate their older

airplanes.36

Threats

Aerospace Competition

Alcoa is not the market leader for aerospace metal fabrication.

Instead, companies including Constellium (NYSE: CSTM) and

Century Aluminum (CENX). CENX, which is a major holding of

the SPDR S&P Metals & Mining ETF (XME) alongside Alcoa, is

heavily invested in aerospace, which, if the demand for

replacement aircrafts rises, competitor’s positions may rise in

retrospect to Alcoa.29

Commodity Price Risks

Alcoa’s partners, as a condition of sale, typically require Alcoa to

enter into long-term fixed-price aluminum commitments. While

these typically present a threat for Alcoa, due to the looming threat

of increased commodity prices in the future, thus reducing their

potential for revenue.37 Alcoa’s commodity risk management

policy is to manage the aluminum price risk associated with a

portion of its firm’s commitments through futures and contracts,

which generally cover three years. At the beginning of 2014,

Alcoa reported 412,000 metric tons of aluminum futures

designated at fair value hedges.26

Foreign Currency Risk

As the US Dollar strengthens, and Alcoa continues to operate with

49 percent of sales (based on point of sale) in foreign countries,

the possibility for damages to Alcoa’s foreign revenues, as USD

approaches par with the Euro, and the Chinese Yuan continues to

fluctuate with the USD throughout 2015.26

International Business Risk

Alcoa has operations or activities in numerous countries outside

the United States, including Brazil, China, Europe, Guinea,

Russia, and Saudi Arabia, that all have various degrees of political

and economic risk. Risk include debt default, civil unrest,

political instability, nationalization, mining leases/permits,

commercial instability caused by corruption, and changes in

government laws/regulations/policies. While the impact of these

factors are unpredictable, they all can adversely affect Alcoa’s

financial condition, operating results or business operations.26


Valuation Analysis

Valuation Summary

After completing extensive research on Alcoa, we have issued a

HOLD recommendation under our underlying belief that actual

stock price is relatively close to what it should be, and that the

current economic conditions in China are presenting an external

influence on Alcoa’s operations, which we expect to be relatively

insignificant to Alcoa’s operations in 2-3 years. We have

determined the intrinsic value of a share of stock using the

discounted cash flow (DCF) model, economic profit (EP) model,

dividend discount (DDM) model, relative valuation P/E model,

and the relative valuation growth P/E (PEG) model. Our models

estimate the intrinsic value as of November 13th, 2015.

Our DCF and EP models provide us with the same intrinsic value

of $33.86 per share, signaling that our stock is currently

underpriced. We believe that these two estimates are overvalued,

due to both the assumptions we made throughout the project to

calculate their respective intrinsic values, and that the end of year

2014 data does not accurately predict the current condition of

Alcoa. The model was the highest of our valuations. The DDM

model gave us an intrinsic price of $9.87 per share. Our relative

valuation model for P/E gave us an intrinsic value of $6.74 per

share, which is lower than current price, signaling that the stock

is currently overvalued. Our relative PEG model gave us an

intrinsic value of $15.82 per share, which we felt was our most

realistic model for Alcoa. The PEG model signals that our stock

is currently undervalued. These models use our estimated EPS

numbers and compare Alcoa to other companies that they

compete against. Relative to their competitors, we feel that Alcoa

is undervalued.

Key Assumptions

Revenue Decomposition

The first steps we took to build our valuation model were to

forecast revenue projects for Alcoa’s four business segments. We

forecasted each segment through 2022, which is the point where

we expect Alcoa to reach steady-state growth, at a rate of 0.2%

annually. We felt that 2022 was close enough for us to provide

an insightful outlook of Alcoa’s potential performance, but was

not too far where we would be struggling to provide an accurate

prediction.

When we forecasted revenues for different business segments, we

initially forecasted them using historical averages of segment

growth rates, using these same rates to forecast future years. We

then adjusted these prediction to reflect changes in the economy

since the end of 2014, as well as additional revenue predictions

from Alcoa’s acquisitions in 2015.

We forecasted COGS as a percentage of revenues, since we were

able to find a correlation between historical COGS and historical

revenues. The historical average used to adjust these COGS was

84.25 percent of sales. Additionally, we also forecasted SG&A

and R&D as a percentage of revenues, since we also found a

correlation between these expenses and historical revenues.

These expenses were adjusted to be 4.21 percent and .085 percent

of revenues, respectively.

We chose to forecast Depreciation as a percentage of previous

year’s Net PPE, since we found a correlation between these two

variables. This depreciation percent of previous year’s Net PPE

was 6.00 percent, which was then subtracted from Gross PPE to

determine current year’s Net PPE. Gross PPE was grown by the

Capital Expenditures, which grew at a constant rate of 3.88

percent, based on a historical average.

Alcoa’s goodwill was held constant, since we do not expect them

to acquire businesses in the near future, or to gain excess

goodwill. Additionally, we held treasury stock constant, since

Alcoa has recently shown a treasury stock balance approaching

zero, as they have issued shares of treasury stock back to the

public. We believe that they will cease to do this when they regain

profitability in the upcoming years.

We forecasted dividends at a constant value of $0.13 dividends

per share throughout the model. We did not feel that Alcoa would

be growing fast enough to be able to issue a larger dividend in the

near future.

DCF & EP Valuation Models

The final result of our DCF and EP Valuation Models gave us an

intrinsic value of $33.86 per share. These two models suggest that

Alcoa is currently extremely undervalued, but we understand that

our assumptions and models could have variability, that would

drastically impact the intrinsic value generated by these models.

Using this valuation alone, we would determine a range of $30 to

$37 for our model.

DDM Model

After developing our DDM model, we discovered an intrinsic

value of $9.87 per share. In this model, our stock is undervalued,

but we believe this is a fair estimate when accounting for all the

potential dividends that an investor could expect to receive from

Alcoa. Relative to current price, this model suggest that we are 19

percent undervalued from the DDM model. If we were to utilize

this model explicitly, we would use an estimated price range of

$9 to $11 per share.

Relative Valuation P/E Ratios

Our relative valuation PEG model gave us an intrinsic value of

$15.82 per share. Again, this expresses that Alcoa’s stock is

undervalued. We chose to compare Alcoa to Aluminum

Corporation of China (ACH), Century Aluminum Company

(CENX), Constellium (CSTM), Crown Holdings Inc. (CCK),

Kaiser Aluminum Corp (KALU), and US Steel Corp (X). As a

median value of the various models we ran, we feel that this is

probably very reflective of Alcoa’s actual intrinsic value, since it

reflects the current condition of Alcoa’s competition, and shows

the impact that the various economic factors have had on them. If

we chose strictly this valuation, we would give a range of $14 to

$17 per share.

Final Consensus

After comparing the various valuation models above, we have

arrived at a consensus price range of $10 to $16, in order to

encapsulate the majority of both the DDM and Relative Valuation

PEG Ratio. We felt that these two models best fit our outlook on

the economy, and accurately reflect both the return for investors


through dividends and future share price, as well as the current

economic conditions’ impact on Alcoa and their competitors.

Sensitivity Analysis

We used a sensitivity analysis to stress our various assumptions

in order to identify which variables would have the most dramatic

impact on our model if they were to deviate from the input values

that we expected. We focused on stressing our core value drivers

and the drivers we felt were most vulnerable to change. To

conduct this analysis, we used the adjusted intrinsic stock price

from the dividend discount model to identify and quantify the

impact of the stressed variables.

COGS as a Percentage of Sales vs CV Growth

We stressed COGS as a percentage of sales against CV growth in

order to identify the price fluctuations in what we believe to be

the biggest value driver for Alcoa. This table shows that the

intrinsic price of Alcoa is extremely sensitive to a change in

COGS as a percentage of sales. When CV growth is held constant,

a 2 percent reduction in COGS as a percentage of sales has the

potential to boost intrinsic stock price by roughly 24 percent. This

represents an appealing opportunity for Alcoa to make small

adjustments in their operations in order to realize much larger

returns.

Equity Risk Premium vs Beta

Intrinsic share price does not seem to fluctuate much with a

change in equity risk premium, but this sensitivity analysis reveals

significant variance when the Beta variable is stressed. We chose

to use the four year monthly Beta for this analysis. We felt that

the monthly measurement best represented the volatility of the

Beta without being impacted too heavily by daily fluctuations, and

we felt the four year time period was appropriate in order to

exclude the Great Recession, which seemed to inaccurately skew

the data. Given that aluminum is heavily cyclical and does not

necessarily correlate consistently with the market, we felt it was

appropriate to test a range in which Alcoa is both more and less

volatile than the market as a whole to systematic risk. A 0.1

change in the Beta changes stock price by approximately 11-12

percent.

Cost of Debt vs Cost of Equity

As the two biggest components in Alcoa’s WACC, we thought it

was important to analyze potential fluctuations in cost of debt and

cost of equity given our expectation of rising interest rates. When

cost of debt is held constant, Alcoa seems to be reasonably well

protected from a rise in cost of equity due to their relatively low

Beta. In addition, it appears that Alcoa is well protected from

fluctuations in cost of debt. When cost of equity is held constant,

changes in cost of debt have a negligible impact on share price.

This is primarily due to the capital structure of Alcoa, which is

composed mostly of equity (63 percent).

Important Disclaimer This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report was

originally created to offer an internal investment recommendation

for the University of Iowa Krause Fund and its advisory board.

The report also provides potential employers and other interested

parties an example of the students’ skills, knowledge and abilities.

Members of the Krause Fund are not registered investment

advisors, brokers or officially licensed financial professionals.

The investment advice contained in this report does not represent

an offer or solicitation to buy or sell any of the securities

mentioned. Unless otherwise noted, facts and figures included in

this report are from publicly available sources. This report is not

a complete compilation of data, and its accuracy is not guaranteed.

From time to time, the University of Iowa, its faculty, staff,

students, or the Krause Fund may hold a financial interest in the

companies mentioned in this report.

10.10 -0.30% -0.20% -0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

74.00% 25.88 26.04 26.20 26.37 26.54 26.71 26.90 27.08 27.28 27.48 27.69

76.00% 22.75 22.87 23.01 23.14 23.28 23.43 23.57 23.73 23.89 24.05 24.22

78.00% 19.61 19.71 19.81 19.92 20.03 20.14 20.25 20.37 20.49 20.62 20.75

80.00% 16.48 16.55 16.62 16.70 16.77 16.85 16.93 17.02 17.10 17.19 17.28

82.00% 13.35 13.39 13.43 13.47 13.52 13.56 13.61 13.66 13.71 13.76 13.81

84.25% 9.82 9.83 9.84 9.85 9.86 9.87 9.87 9.88 9.89 9.90 9.91

85.00% 8.65 8.64 8.64 8.64 8.64 8.63 8.63 8.62 8.62 8.61 8.61

85.50% 7.86 7.85 7.84 7.83 7.82 7.81 7.80 7.78 7.77 7.76 7.74

86.00% 7.08 7.06 7.05 7.03 7.01 6.99 6.97 6.95 6.92 6.90 6.87

87.00% 5.51 5.48 5.45 5.42 5.38 5.34 5.31 5.27 5.23 5.18 5.14

88.00% 3.95 3.90 3.85 3.80 3.75 3.70 3.65 3.59 3.53 3.47 3.40

89.00% 2.38 2.32 2.26 2.19 2.13 2.06 1.99 1.91 1.83 1.75 1.67

CV Growth

CO

GS

% S

ales

9.87 4.20% 4.30% 4.40% 4.50% 4.60% 4.62% 4.70% 4.80% 4.90% 5.00% 5.10%

0.200 18.03 17.91 17.80 17.68 17.57 17.55 17.46 17.35 17.24 17.13 17.02

0.30 15.83 15.69 15.55 15.41 15.28 15.25 15.15 15.02 14.89 14.77 14.64

0.400 14.05 13.89 13.74 13.60 13.45 13.42 13.31 13.17 13.03 12.90 12.77

0.50 12.57 12.42 12.26 12.11 11.96 11.93 11.82 11.67 11.53 11.40 11.26

0.600 11.34 11.18 11.02 10.87 10.72 10.69 10.58 10.43 10.29 10.16 10.02

0.68 10.51 10.35 10.19 10.04 9.89 9.87 9.75 9.61 9.47 9.33 9.20

0.80 9.39 9.24 9.08 8.94 8.79 8.76 8.65 8.51 8.38 8.25 8.12

0.90 8.61 8.46 8.31 8.17 8.03 8.00 7.89 7.75 7.62 7.50 7.37

1.00 7.93 7.78 7.64 7.50 7.36 7.33 7.23 7.10 6.97 6.85 6.73

1.10 7.33 7.19 7.05 6.91 6.78 6.75 6.65 6.52 6.40 6.29 6.17

1.20 6.80 6.66 6.52 6.39 6.26 6.24 6.14 6.02 5.90 5.79 5.68

1.30 6.33 6.19 6.06 5.93 5.81 5.78 5.69 5.57 5.46 5.35 5.25

Equity Risk Premium

Bet

a

9.87 5.50% 5.60% 5.70% 5.80% 5.90% 5.95% 6.00% 6.10% 6.20% 6.30% 6.40%

5.60% 11.54 11.48 11.43 11.37 11.31 11.29 11.26 11.20 11.15 11.09 11.04

5.70% 11.27 11.22 11.16 11.11 11.05 11.02 11.00 10.94 10.89 10.83 10.78

5.80% 11.01 10.96 10.90 10.85 10.80 10.77 10.75 10.69 10.64 10.59 10.53

5.90% 10.76 10.71 10.66 10.61 10.55 10.53 10.50 10.45 10.40 10.35 10.30

6.00% 10.52 10.47 10.42 10.37 10.32 10.29 10.27 10.22 10.17 10.12 10.07

6.10% 10.29 10.24 10.19 10.14 10.09 10.07 10.04 9.99 9.94 9.89 9.85

6.192% 10.08 10.04 9.99 9.94 9.89 9.87 9.84 9.79 9.75 9.70 9.65

6.30% 9.85 9.80 9.76 9.71 9.66 9.64 9.61 9.57 9.52 9.47 9.43

6.40% 9.64 9.60 9.55 9.50 9.46 9.43 9.41 9.37 9.32 9.27 9.23

6.50% 9.44 9.40 9.35 9.30 9.26 9.24 9.21 9.17 9.13 9.08 9.04

6.60% 9.25 9.20 9.16 9.11 9.07 9.05 9.02 8.98 8.94 8.89 8.85

6.70% 9.06 9.01 8.97 8.93 8.88 8.86 8.84 8.80 8.76 8.71 8.67

Cost of Debt

Co

st o

f Eq

uit

y


Sources

1 Bureau of Economic Analysis |

http://bea.gov/newsreleases/national/GDP/GDPnewsrelease.htm 2Trading Economics: US GDP Growth |

http://www.tradingeconomics.com/united-states/gdp-growth-annual 3 NASDAQ Markets | http://www.nasdaq.com/markets

4 Index Mundi | http://www.indexmundi.com/commodities/

5 T rading Economics: Consumer Confidence |

http://www.tradingeconomics.com/united-states/consumer-confidence 6 Conference Board: Consumer Confidence | https://www.conference-

board.org/data/consumerconfidence.cfm 7 Kelly, David. Market Insights: Economic Update. JP Morgan Asset

Management. Nov. 9, 2015. 8 IBISWorld |

http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=990030 9 XE | http://www.xe.com/currencycharts/?from=USD&to=JPY&view=5Y

10 ScotiaBank Fx Outlook |

http://www.gbm/scotiabank.com/English/bns_econ/fxout.pdf 11

Yahoo! Finance: Federal Funds Rate | http://finance.yahoo.com/news/federal-funds-rate-rises-asset-202236049.html

12 US Inflation Calculator |

http://www.usinflationcalculator.com/inflation/current-inflation-rates/ 13

USA Today | http://www.usatoday.com/story/money/markets/2015/02/25/yellen-house-testimony/23962867/

14 Bureau of Labor Statistics | http://www.bls.gov/news.release/empsit.nr0.htm

15 Bureau of Labor Statistics | http://data.bls.gov/pdq/SurveyOutputServlet

16 US Customs | http://service.customs.gov.cn/default.aspx?tabid=9409

17 Kelly, David. Guide to the Markets. JP Morgan Asset Management. 4Q 2015

18 Giles, Chris & Emily Cadman. Britain takes dovish path on raising interest rates. Financial Times, November 6 th 2015.

19 Investopedia: Basic Materials |

http://www.investopedia.com/terms/b/basic_materials.asp 20

Security Analysis: GICS | http://www.unm.edu/~maj/Security%20Analysis/GICS.pdf

21 New York T imes: Sector Analysis |

http://markets.on.nytimes.com/research/markets/usmarkets/industry.asp?in

dustry=51213&sector=51

22 XLB Holdings | http://www.sectorspdr.com/sectorspdr/sector/xlb/holdings

23 S&P Net Advantage |

http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/simpleSearchRun.do?ControlName=IndustriesSurveySearch

24S&P 500 Materials Sector | http://us.spindices.com/indices/equity/sp-500-

materials-sector 25

Aluminum Markets | http://markets.ft.com/research/Markets/Sectors-And-Industries/Basic-Materials/Aluminum

26 Alcoa 10-K: FY2014

27 Alcoa Global News |

http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20140213000192en&newsYear=2014

28 Market Realist: Oil Prices on Alcoa | http://marketrealist.com/2015 /01/lower-

crude-oil-prices-great-key-clients-maybe-not-alcoa/ 29

Alcoa 10-Q 2015 30

Alcoa Global News | http://www.alcoa.com/global/en/news/news_detail.asp?pageID=201503030

00260en&newsYear=2015 31

Market Watch: Alcoa Shares Fall After 3rd Quarer Results Miss | http://www.marketwatch.com/story/alcoa-shares-fall-after-third-quarter-results-miss-2015-10-08

32 Alcoa Global News |

http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20151102000304en&newsYear=2015

33 Fool: How Ford & Alcoa Will Make The 2016 F-150 Even… |

http://www.fool.com/investing/general/2015/09/ 17/how-ford-and-alcoa-will-make-the-2016-f-150-even-l.aspx

34 WSJ: Ford & Alcoa Expand Aluminum Supply Deal |

http://www.wsj.com/articles/ford-alcoa-expand-aluminum-supply-deal-1442273133

35 Alcoa Consumer Electronics | http://www.alcoa.com/ con_electronics/

en/info_page/home.asp. 36

NASDAQ Crude Oil | http://www.nasdaq.com/markets/ crude-oil.aspx 37

Alcoa Market Risks & Derivative Activities | http://www.wikinvest.com/stock/Alcoa_(AA)/Market_Risks_Derivative_Activities

Alcoa

AA | 15

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Revenue by Product Segment

Primary Metals 10,309 9,217 9,731 9,634 9,826 10,121 10,475 10,894 11,330 11,897 12,492 Global-Rolled Products 7,541 7,284 7,536 7,913 8,308 8,724 9,160 9,476 9,803 10,141 10,491 Engineered Solutions 5,525 5,733 6,006 6,306 8,348 9,473 10,423 11,402 11,744 12,096 12,459 Alumina 5,402 5,561 5,450 5,341 5,288 5,288 5,314 5,367 5,421 5,529 5,640 Adjustment (5,077) (4,763) (4,817) (5,620) (6,116) (6,469) (5,748) (6,035) (6,223) (6,445) (6,676)

Total 23,700 23,032 23,906 23,574 25,654 27,136 29,624 31,104 32,074 33,218 34,406 Segment % of Revenue

Primary Metals 43.50% 40.02% 40.71% 40.87% 38.30% 37.30% 35.36% 35.03% 35.32% 35.81% 36.31% Global-Rolled Products 31.82% 31.63% 31.52% 33.57% 32.39% 32.15% 30.92% 30.47% 30.56% 30.53% 30.49% Engineered Solutions 23.31% 24.89% 25.12% 26.75% 32.54% 34.91% 35.18% 36.66% 36.61% 36.41% 36.21% Alumina 22.79% 24.14% 22.80% 22.66% 20.61% 19.49% 17.94% 17.26% 16.90% 16.65% 16.39%

Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Segment Revenue % Growth

Primary Metals ‐9.82% ‐10.59% 5.58% ‐1.00% 2.00% 3.00% 3.50% 4.00% 4.00% 5.00% 5.00% Global-Rolled Products ‐4.06% ‐3.41% 3.46% 5.00% 5.00% 5.00% 5.00% 3.45% 3.45% 3.45% 3.45% Engineered Solutions 3.37% 3.76% 4.76% 5.00% 32.37% 13.48% 10.03% 9.39% 3.00% 3.00% 3.00% Alumina ‐12.72% 2.94% ‐2.00% ‐2.00% ‐1.00% 0.00% 0.50% 1.00% 1.00% 2.00% 2.00% Adjustment ‐13.58% ‐6.18% 1.13% 16.67% 8.82% 5.78% ‐11.15% 5.00% 3.12% 3.57% 3.58%

Total ‐2.82% 3.79% ‐1.39% 8.82% 5.78% 9.17% 5.00% 3.12% 3.57% 3.58% Revenue/Metric Ton (Thousands $)

Primary Metals 3.37 3.29 3.84 4.01 4.07 4.08 4.12 4.13 4.15 4.16 4.18 Global-Rolled Products 4.04 3.82 3.84 3.89 3.85 3.80 3.79 3.76 3.74 3.72 3.71 Engineered Solutions 24.89 25.03 24.41 24.99 25.76 26.41 26.69 27.00 27.18 27.38 27.50 Alumina 0.58 0.56 0.51 0.51 0.48 0.47 0.46 0.46 0.45 0.45 0.44

Total 32.88 32.70 32.60 33.40 34.16 34.76 35.05 35.34 35.53 35.71 35.83

Alcoa

AA | 16

Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Sales 23,700 23,032 23,906 23,574 25,654 27,136 29,624 31,104 32,074 33,218 34,406 Cost of Goods Sold 20,401 19,286 19,137 19,861 21,614 22,862 24,959 26,205 27,023 27,986 28,987 Selling, general administrative, and other expenses 997 1,008 995 992 1,080 1,142 1,247 1,309 1,350 1,398 1,448 Research and Development expenses 197 192 218 200 218 231 252 264 273 282 292 Depreciation 1,378 1,348 1,288 986 1,010 1,037 1,065 1,096 1,128 1,162 1,198 Amortization of Intangibles 82 73 83 83 74 65 58 51 46 41 36 Impairment of Goodwill ‐ 1,731 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Restructuring and other charges 172 782 1,168 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Interest expense 490 453 473 527 468 534 563 567 573 590 607 Other income, net (341) (25) 47 117 93 109 119 115 115 125 137

Total costs and expenses 23,376 24,848 23,409 22,766 24,557 25,981 28,263 29,608 30,507 31,584 32,706 Income from continuing operations before taxes on income 324 (1,816) 497 808 1,098 1,156 1,362 1,496 1,567 1,634 1,700 Provision for taxes on income 162 428 320 259 351 370 436 479 502 523 544 Income from continuing operations 162 (2,244) 177 549 746 786 926 1,017 1,066 1,111 1,156 (Loss) Income from discontinued operations (29) 41 (91) ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Net (Loss) Income 191 (2,285) 268 549 746 786 926 1,017 1,066 1,111 1,156 Common Shares Outstanding 1,067 1,071 1,217 1,310 1,315 1,320 1,325 1,330 1,335 1,340 1,345 Dividends Per Share Earnings (loss) per Common Share

Basic

$ 0.12 $ 0.12 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13

Income from continuing operations $ 0.18 $ (2.14) $ 0.22 $ 0.42 $ 0.57 $ 0.60 $ 0.70 $ 0.76 $ 0.80 $ 0.83 $ 0.86 Net (loss) income $ 0.18 $ (2.14) $ 0.22 $ 0.42 $ 0.57 $ 0.60 $ 0.70 $ 0.76 $ 0.80 $ 0.83 $ 0.86

Alcoa

AA | 17

Balance Sheet Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Assets Current Assets

Cash & Cash Equivalents 1,861 1,437 1,877 950 1,331 1,487 1,188 1,028 1,153 1,341 1,570 Receivables from customer 1,399 1,221 1,395 1,551 1,688 1,786 1,949 2,047 2,110 2,186 2,264 Other receivables 340 597 733 549 598 632 690 725 747 774 802 Inventories 2,825 2,705 3,082 2,864 3,117 3,297 3,599 3,779 3,897 4,036 4,180 Prepaid expenses and other current assets 1,275 1,009 1,182 1,070 1,165 1,232 1,345 1,412 1,456 1,508 1,562

Total Current Assets 7,700 6,969 8,269 6,985 7,899 8,434 8,772 8,990 9,364 9,845 10,378 PP&E, net 18,947 17,639 16,426 16,840 17,284 17,758 18,262 18,796 19,362 19,960 20,590

PP&E, gross 38,137 36,866 35,728 37,128 38,582 40,093 41,662 43,293 44,986 46,745 48,573 Accumulated Depreciation 19,190 19,227 19,302 20,288 21,298 22,335 23,401 24,496 25,624 26,786 27,983

Goodwill, net 5,170 3,415 5,247 5,247 5,247 5,247 5,247 5,247 5,247 5,247 5,247 Investments 1,860 1,907 1,944 2,082 2,229 2,388 2,558 2,740 2,936 3,146 3,372

Equity Investments 1,782 1,777 1,780 1,913 2,055 2,208 2,373 2,549 2,739 2,944 3,163 Fixed Income Investments 78 130 164 169 174 180 185 191 197 203 209

Deferred income taxes 3,790 3,184 2,754 2,114 2,873 3,025 3,564 3,915 4,102 4,276 4,449 Other noncurrent assets 2,712 2,628 2,759 2,748 2,749 2,761 2,784 2,815 2,856 2,904 2,960

Intangibles, net 407 399 737 654 580 515 457 406 360 319 283 Misc. Noncurrent Assets 2,305 2,229 2,022 2,094 2,169 2,246 2,327 2,410 2,496 2,585 2,677

Total Assets 40,179 35,742 37,399 36,016 38,281 39,612 41,186 42,505 43,867 45,378 46,995 Liabilities Current Liabilities:

Short-term borrowings 53 57 54 68 74 78 85 89 92 95 99 Accounts payable, trade 2,702 2,960 3,152 2,669 2,904 3,072 3,353 3,521 3,631 3,760 3,895 Accrued compensation and retirement costs 1,058 1,013 937 979 1,066 1,127 1,231 1,292 1,332 1,380 1,429 Taxes, including income taxes 366 376 348 281 382 402 474 521 545 569 592 Other current liabilities 1,298 1,044 1,021 1,148 1,249 1,321 1,442 1,515 1,562 1,617 1,675 Long-term debt due within one year 465 655 29 28 767 1,043 772 567 584 601 619

Total Current Liabilities 5,942 6,105 5,541 5,172 6,441 7,043 7,357 7,504 7,746 8,022 8,309 Long-term debt, less amount due within one year 8,311 7,607 8,769 7,769 8,130 8,343 8,674 8,968 9,233 9,509 9,799 Accrued pension benefits 3,722 3,183 3,291 2,910 2,573 2,275 2,012 1,779 1,573 1,391 1,230 Accrued other postretirement benefits 2,603 2,354 2,155 1,993 1,844 1,705 1,578 1,459 1,350 1,248 1,155 Other noncurrent liabilities and deferred credits 3,078 2,971 2,849 2,980 3,256 3,386 3,641 3,818 3,943 4,076 4,214

Deferred Revenues 438 258 155 285 310 328 358 376 388 402 416 Accrued compensation and retirement costs 322 342 346 334 364 385 420 441 455 471 488 Environmental Remediation 458 461 473 372 405 429 468 491 507 525 544 Deferred Income Taxes 460 403 330 307 417 439 518 569 596 621 646 Misc. Noncurrent Liabilities 1,400 1,507 1,545 1,681 1,759 1,805 1,877 1,940 1,998 2,057 2,120

Total Liabilities 23,656 22,220 22,605 20,824 22,244 22,754 23,261 23,528 23,844 24,246 24,706 Equity Alcoa shareholders' equity:

Preferred Stock (Carrying Value) 55 55 58 58 58 58 58 58 58 58 58 Common Stock, including APIC 8,738 8,687 10,588 10,644 10,700 10,757 10,813 10,869 10,925 10,981 11,038 Retained earnings 11,689 9,272 9,379 9,755 10,328 10,939 11,689 12,531 13,420 14,354 15,332 Treasury stock, at cost (3,881) (3,762) (3,042) (3,042) (3,042) (3,042) (3,042) (3,042) (3,042) (3,042) (3,042) Accumulated other comprehensive income (3,402) (3,659) (4,677) (4,677) (4,677) (4,677) (4,677) (4,677) (4,677) (4,677) (4,677) Total Alcoa shareholders' equity 13,199 10,593 12,306 12,738 13,367 14,034 14,841 15,739 16,684 17,675 18,709

Noncontrolling Interests 3,324 2,929 2,488 2,453 2,670 2,824 3,083 3,237 3,338 3,457 3,581 Total Equity 16,523 13,522 14,794 15,192 16,037 16,859 17,924 18,976 20,023 21,132 22,290

Total Liabilities & Equity 40,179 35,742 37,399 36,016 38,281 39,612 41,186 42,505 43,867 45,378 46,995

AA | 18

Alcoa Cash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 Cash from Operations Net Income

162

‐2244

177

Adjustments to reconcile net income (loss) to cash from operations: Depreciation 1378 1348 1288 Amortization of Intangibles 80 74 84 Deferred income taxes ‐99 178 ‐35 Equity income, net of dividends 2 77 104 Impairment of goodwill 0 1731 0 Restructuring and other charges Net gain from investing activities - asset sales Stock-based compensation

172 ‐321

67

782 ‐10 71

1168 ‐47 87

Excess tax benefits from stock-based payment arrangements ‐1 0 ‐9 Other 63 4 66 Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign

currency translation adjustments (Increase) decrease in receivables 104 ‐141 ‐312 (Increase) decrease in inventories (Increase) in prepaid expenses and other current assets Increase (decrease) in accounts payable, trade (Decrease) in accrued expenses Increase (decrease) in taxes, including income taxes Pension contributions (Increase) decrease in noncurrent assets

96 ‐62 ‐12 ‐166

15 ‐561

9

25 ‐9

326 ‐418 ‐43 ‐462 ‐153

‐355 ‐25 256 ‐451

7 ‐501 ‐19

Increase in noncurrent liabilities 570 442 191 Cash provided from continuing operations 1500 1578 1674 Cash used for discontinued operations ‐3 0 0 Cash provided from operations 1497 1578 1674

Financing Activities Net change in short-term borrowings (original maturities of three months or less)

‐10

5

‐2

Net change in commercial paper ‐224 0 0 Additions to debt (original maturities greater than three months) Debt issuance costs Payments on debt (original maturities greater than three months) Proceeds from exercise of employee stock options

972 ‐5

‐1489 12

1852 ‐3

‐2317 13

2878 ‐17

‐1723 150

Excess tax benefits from stock-based payment arrangements 1 0 9 Issuance of mandatory convertible preferred stock 0 0 1211 Issuance of Common Stock Dividends paid to shareholders Distributions to noncontrolling interests Contributions from noncontrolling interests

0 ‐131 ‐95 171

0 ‐132 ‐109

12

0 ‐161 ‐120

53 Acquisitions of noncontrolling interest 0 0 ‐28

Cash provided from (used for) financing activities ‐798 ‐679 2250 Investing Activities Capital expenditures

‐1261

‐1193

‐1219

Acquisitions, net of cash acquired 0 0 ‐2385 Proceeds from the sale of assets and businesses Additions to investments Sale of investments

615 ‐300

31

13 ‐293

0

253 ‐195

57 Net change in restricted cash 87 170 ‐2 Other 69 13 31

Cash used for investing activities ‐759 ‐1290 ‐3460 Effect of exchange rate changes on cash and cash equivalents ‐18 ‐33 ‐24

Net change in cash and cash equivalents ‐78 ‐424 440 Cash and cash equivalents at beginning of year 1939 1861 1437

Cash and cash equivalents at end of year 1861 1437 1877

AA | 19

Alcoa Cash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Operating Activities Net Income 549 746 786 926 1,017 1,066 1,111 1,156 Adjustments for Non-Cash Operating Expenses

Depreciation 986 1,010 1,037 1,065 1,096 1,128 1,162 1,198 Change in Receivables from customer 156 137 98 164 97 64 75 78 Change in Other receivables (184) 48 35 58 34 23 27 28 Change in Inventories (218) 253 180 302 180 118 139 144 Change in Intangible Assets (83) (74) (65) (58) (51) (46) (41) (36) Change in Prepaid expenses and other current assets (112) 94 67 113 67 44 52 54 Change in Deferred Income (617) 648 130 461 301 159 149 147 Change in Accounts payable, trade (483) 236 168 282 168 110 129 134 Change in Accrued compensation and retirement costs 42 86 62 103 61 40 48 49 Change in Taxes, including income taxes (67) 101 20 72 47 25 23 23 Change in Accrued pension benefits (381) (337) (298) (263) (233) (206) (182) (161) Change in Accrued other postretirement benefits (162) (150) (138) (128) (118) (109) (101) (94) Change in Other current liabilities 127 101 72 121 72 47 56 58 Change in Other noncurrent liabilities and deferred credits 154 166 108 176 126 98 108 113

Cash from Operating Activities 1,822 853 1,373 1,314 1,608 1,836 1,952 2,061

Investing Activites

Capital Expenditures (1,400) (1,454) (1,511) (1,569) (1,630) (1,694) (1,759) (1,827) Change in Investments (138) (148) (158) (170) (182) (196) (210) (225) Change in Other noncurrent assets (72) (75) (77) (80) (83) (86) (89) (92) Change in Noncontrolling Interests (35) 217 154 259 154 101 119 124

Cash from Investing Activities (1,644) (1,460) (1,592) (1,561) (1,742) (1,874) (1,939) (2,022)

Financing Activities

Dividends (173) (174) (175) (175) (176) (177) (177) (178) Change in ST Debt and Current Portion of LTD 13 745 280 (264) (201) 19 21 22 Change in LTD (1,000) 362 213 331 294 264 276 290 Change in Common Stock 56 56 56 56 56 56 56 56 Issunces From Treasury (Share Repurchase) - - - - - - - - Change in other accumulated comprehensive income - - - - - - - -

Cash from Financing Activities (1,105) 989 375 (52) (26) 164 175 190

Change in Cash (927) 382 155 (299) (160) 126 188 229 Beginning Cash 1,877 950 1,331 1,487 1,188 1,028 1,153 1,341 Ending Cash 950 1,331 1,487 1,188 1,028 1,153 1,341 1,570

AA | 20

Alcoa Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Sales 23,700 23,032 23,906 23,574 25,654 27,136 29,624 31,104 32,074 33,218 34,406 Cost of Goods Sold 86.08% 83.74% 80.05% 84.25% 84.25% 84.25% 84.25% 84.25% 84.25% 84.25% 84.25% Selling, general administrative, and other expenses 4.21% 4.38% 4.16% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% Research and Development expenses 0.83% 0.83% 0.91% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% Depreciation 5.81% 5.85% 5.39% 4.18% 3.94% 3.82% 3.60% 3.52% 3.52% 3.50% 3.48% Amortization of Intangibles 0.35% 0.32% 0.35% 0.35% 0.29% 0.24% 0.20% 0.17% 0.14% 0.12% 0.10% Impairment of Goodwill 0.00% 7.52% 0.00% ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Restructuring and other charges ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Interest expense 2.07% 1.97% 1.98% 2.23% 1.82% 1.97% 1.90% 1.82% 1.79% 1.77% 1.76% Other income, net ‐1.44% ‐0.11% 0.20% 0.50% 0.36% 0.40% 0.40% 0.37% 0.36% 0.38% 0.40%

Total costs and expenses 98.63% 107.88% 97.92% 96.57% 95.72% 95.74% 95.40% 95.19% 95.11% 95.08% 95.06% Income from continuing operations before taxes on income 1.37% ‐7.88% 2.08% 3.43% 4.28% 4.26% 4.60% 4.81% 4.89% 4.92% 4.94% Provision for taxes on income 0.68% 1.86% 1.34% 1.10% 1.37% 1.36% 1.47% 1.54% 1.56% 1.57% 1.58% Income from continuing operations 0.68% ‐9.74% 0.74% 2.33% 2.91% 2.90% 3.13% 3.27% 3.32% 3.35% 3.36% (Loss) Income from discontinued operations ‐0.12% 0.18% ‐0.38% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net (Loss) Income 0.81% ‐9.92% 1.12% 2.33% 2.91% 2.90% 3.13% 3.27% 3.32% 3.35% 3.36%

AA | 21

Alcoa Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Sales 23,700 23,032 23,906 23,574 25,654 27,136 29,624 31,104 32,074 33,218 34,406 Assets Current Assets

Cash & Cash Equivalents 7.85% 6.24% 7.85% 4.03% 5.19% 5.48% 4.01% 3.30% 3.60% 4.04% 4.56% Receivables from customer 5.90% 5.30% 5.84% 6.58% 6.58% 6.58% 6.58% 6.58% 6.58% 6.58% 6.58% Other receivables 1.43% 2.59% 3.07% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33% Inventories 11.92% 11.74% 12.89% 12.15% 12.15% 12.15% 12.15% 12.15% 12.15% 12.15% 12.15% Prepaid expenses and other current assets 5.38% 4.38% 4.94% 4.54% 4.54% 4.54% 4.54% 4.54% 4.54% 4.54% 4.54%

Total Current Assets 32.49% 30.26% 34.59% 29.63% 30.79% 31.08% 29.61% 28.90% 29.20% 29.64% 30.16% PP&E, net 79.95% 76.58% 68.71% 71.44% 67.37% 65.44% 61.64% 60.43% 60.37% 60.09% 59.84%

PP&E, gross 160.92% 160.06% 149.45% 157.50% 150.39% 147.75% 140.64% 139.19% 140.26% 140.72% 141.18% Accumulated Depreciation 80.97% 83.48% 80.74% 86.06% 83.02% 82.31% 78.99% 78.76% 79.89% 80.64% 81.33%

Goodwill, net 21.81% 14.83% 21.95% 22.26% 20.45% 19.34% 17.71% 16.87% 16.36% 15.80% 15.25% Investments 7.85% 8.28% 8.13% 8.83% 8.69% 8.80% 8.63% 8.81% 9.15% 9.47% 9.80%

Equity Investments 7.52% 7.72% 7.45% 8.11% 8.01% 8.14% 8.01% 8.20% 8.54% 8.86% 9.19% Fixed Income Investments 0.33% 0.56% 0.69% 0.72% 0.68% 0.66% 0.62% 0.61% 0.61% 0.61% 0.61%

Deferred income taxes 15.99% 13.82% 11.52% 8.97% 11.20% 11.15% 12.03% 12.59% 12.79% 12.87% 12.93% Other noncurrent assets 11.44% 11.41% 11.54% 11.66% 10.72% 10.18% 9.40% 9.05% 8.90% 8.74% 8.60%

Intangibles, net 1.72% 1.73% 3.08% 2.77% 2.26% 1.90% 1.54% 1.30% 1.12% 0.96% 0.82% Misc. Noncurrent Assets 9.73% 9.68% 8.46% 8.88% 8.45% 8.28% 7.85% 7.75% 7.78% 7.78% 7.78%

Total Assets 169.53% 155.18% 156.44% 152.78% 149.22% 145.97% 139.03% 136.65% 136.77% 136.61% 136.59% Liabilities Current Liabilities:

Short-term borrowings 0.22% 0.25% 0.23% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% Accounts payable, trade 11.40% 12.85% 13.18% 11.32% 11.32% 11.32% 11.32% 11.32% 11.32% 11.32% 11.32% Accrued compensation and retirement costs 4.46% 4.40% 3.92% 4.15% 4.15% 4.15% 4.15% 4.15% 4.15% 4.15% 4.15% Taxes, including income taxes 1.54% 1.63% 1.46% 1.19% 1.49% 1.48% 1.60% 1.67% 1.70% 1.71% 1.72% Other current liabilities 5.48% 4.53% 4.27% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% Long-term debt due within one year 1.96% 2.84% 0.12% 0.12% 2.99% 3.84% 2.61% 1.82% 1.82% 1.81% 1.80%

Total Current Liabilities 25.07% 26.51% 23.18% 21.94% 25.11% 25.96% 24.84% 24.13% 24.15% 24.15% 24.15% Long-term debt, less amount due within one year 35.07% 33.03% 36.68% 32.96% 31.69% 30.75% 29.28% 28.83% 28.79% 28.63% 28.48% Accrued pension benefits ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Accrued other postretirement benefits ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Other noncurrent liabilities and deferred credits 12.99% 12.90% 11.92% 12.64% 12.69% 12.48% 12.29% 12.27% 12.29% 12.27% 12.25%

Deferred Revenues 1.85% 1.12% 0.65% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% Accrued compensation and retirement costs 1.36% 1.48% 1.45% 1.42% 1.42% 1.42% 1.42% 1.42% 1.42% 1.42% 1.42% Environmental Remediation 1.93% 2.00% 1.98% 1.58% 1.58% 1.58% 1.58% 1.58% 1.58% 1.58% 1.58% Deferred Income Taxes 1.94% 1.75% 1.38% 1.30% 1.63% 1.62% 1.75% 1.83% 1.86% 1.87% 1.88% Misc. Noncurrent Liabilities 5.91% 6.54% 6.46% 7.13% 6.86% 6.65% 6.34% 6.24% 6.23% 6.19% 6.16%

Total Liabilities 99.81% 96.47% 94.56% 88.34% 86.71% 83.85% 78.52% 75.64% 74.34% 72.99% 71.81% Equity Alcoa shareholders' equity:

Preferred Stock (Carrying Value) 0.23% 0.24% 0.24% 0.25% 0.23% 0.21% 0.20% 0.19% 0.18% 0.17% 0.17% Common Stock, including APIC 36.87% 37.72% 44.29% 45.15% 41.71% 39.64% 36.50% 34.94% 34.06% 33.06% 32.08% Retained earnings 49.32% 40.26% 39.23% 41.38% 40.26% 40.31% 39.46% 40.29% 41.84% 43.21% 44.56% Treasury stock, at cost ‐16.38% ‐16.33% ‐12.72% ‐12.90% ‐11.86% ‐11.21% ‐10.27% ‐9.78% ‐9.48% ‐9.16% ‐8.84% Accumulated other comprehensive income ‐14.35% ‐15.89% ‐19.56% ‐19.84% ‐18.23% ‐17.24% ‐15.79% ‐15.04% ‐14.58% ‐14.08% ‐13.59% Total Alcoa shareholders' equity 55.69% 45.99% 51.48% 54.04% 52.10% 51.72% 50.10% 50.60% 52.02% 53.21% 54.38%

Noncontrolling Interests 14.03% 12.72% 10.41% 10.41% 10.41% 10.41% 10.41% 10.41% 10.41% 10.41% 10.41% Total Equity 69.72% 58.71% 61.88% 64.44% 62.51% 62.13% 60.51% 61.01% 62.43% 63.62% 64.78%

Total Liabilities & Equity 169.53% 155.18% 156.44% 152.78% 149.22% 145.97% 139.03% 136.65% 136.77% 136.61% 136.59%

AA | 22

Alcoa Weighted Average Cost of Capital (WACC) Estimation WACC: Cost of Equity (RE) Risk Free Rate 3.06% Risk Premium 4.62% Beta 0.678 Cost of Equity 6.192%

Cost of Debt (RD) 22‐Year Bond Yield 5.95% Tax Rate 32.30% After Tax 4.028%

Cost of Preferred Stock (RP)

Preferred Dividends ‐ Class A $ 3.75 Net Issuing Price $ 85.00 Class A Shares Outstanding 660,000 Cost of Preferred Stock (A) 4.41% Preferred Dividends ‐ Class B Net Issuing Price

$ 2.69 $ 29.40

Class B Shares Outstanding 25,000,000 Cost of Preferred Stock (B) 9.141%

Weights Total Equity

$10,467,929,431.60 # Shares 1,310,128,840 $/Share $7.99

Total Debt $ 9,538,000,000.00 Total Preferred Stock (A) $ 56,100,000.00 Total Preferred Stock (B) $ 735,000,000.00 Total Value $ 20,797,029,431.60 Weight Equity 50.334% Weight Debt 45.862% Weight Preferred (A) 0.270% Weight Preferred (B) 3.534% WACC 5.299%

AA | 23

Alcoa Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 0.20% CV ROIC 11.21% WACC 5.30% Cost of Equity 6.19%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2019E 2020E 2021E 2022CV DCF Model

Periods 1 2 3 4 5 6 7 7 FCF CV of FCF

1,096 943 1,508 1,443 1,754 1,950 2,016 53,875

PV of FCF Discounted by WACC Value of Operating Assets 46,079

Add: Excess Cash 1,459 Add: Investments 1,944 Add: Non‐Operating Assets 2,759 Less: ESOP (58) Less: PV of OP Leases (686) Less: Short Term Debt (54) Less: Long Term Debt (8,798) Less: Other Current Liabilities (1,021) Less: Other Non‐Current Liabilities (2,849) Less: Preferred Stock (58) Add: Noncontrolling Interest 2,488

1,041 851 1,291 1,173 1,355 1,430 1,405 37,533

Value of Equity 41,205 Shares Outstanding 1,217 Intrinsic Value Per Share (1/1/15) 33.86 Adjusted Value Per Share (11/13/15) 33.92

EP Model

Period to Discount 1 2 3 4 5 6 7 7 Economic Profit

(EP) CV of EP 1,199 182 831 781 1,092 1,305 1,395

28,913 Present Value Beg. Invested Capital 20,513 Value of Operating Assets 46,079

Add: Excess Cash 1,459 Add: Investments 1,944 Add: Non‐Operating Assets 2,759 Less: ESOP (58) Less: PV of OP Leases (686) Less: Short Term Debt (54) Less: Long Term Debt (8,798) Less: Other Current Liabilities (1,021) Less: Other Non‐Current Liabilities (2,849) Less: Preferred Stock (58) Add: Noncontrolling Interest 2,488

1,138 165 712 635 844 957 972 20,143

Value of Equity 41,205

Shares Outstanding 1,217 Intrinsic Value Per Share (1/1/15) 33.86 Adjusted Value Per Share (11/13/15) 33.92

AA | 24

Alcoa Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Intrinsic Value (1/1/2015)

$ 9.85

Adjusted Value (11/13/2015) $ 9.87

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV

EPS Key Assumptions CV growth CV ROE Cost of Equity Retention Ratio

Future Cash Flows

$ 0.42

0.20% 6.20% 6.19% 98.73%

$ 0.57

$ 0.60

$ 0.70

$ 0.76

$ 0.80

$ 0.83

$ 0.86

Period 1 2 3 4 5 6 7 7 P/E Multiple (CV Year) 16.15 EPS (CV Year) 0.86 Future Stock Price $ 13.88 Dividends Per Share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 Future Cash Flows $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 Future Cash Flows (CV) $ 13.88

Discounted Cash Flows $ 0.12 $ 0.12 $ 0.11 $ 0.10 $ 0.10 $ 0.09 $ 0.09 $ 9.11

AA | 25

Alcoa Relative Valuation Models

Ticker

Company

Price

EPS

EPS

P/E 15

P/E 16

Est. 5yr

PEG 15

PEG

ACH Aluminum Corp of China $7.74 ($0.10) ($0.01) ‐ ‐ 218.7 ‐ ‐ CENX Century Aluminum Co. $3.64 $0.03 ($0.41) ‐ ‐ 7.00 CSTM Constellium $8.19 ($0.41) $0.82 ‐ 10.0 25.96 ‐ 0.38 CCK Crown Holdings, Inc. $50.15 $3.59 $3.95 14.0 12.7 8.29 1.69 1.53 KALU Kaiser Aluminum Corp. $81.22 $4.47 $5.40 18.2 15.0 18.48 0.98 0.81 X US Steel Corp $9.75 ($2.37) ($0.49) ‐ ‐ ‐24.53 ‐ ‐ Average 16.1 12.6 1.3 0.9

AA Alcoa $7.99 $ 0.42 $ 0.57 19.1 14.1 28.28 0.7 0.5

Implied Value: Relative P/E (EPS15) $ 6.74 Relative P/E (EPS16) $ 7.14 PEG Ratio (EPS15) $ 15.82 PEG Ratio (EPS16) $ 14.61

AA | 26

Alcoa Key Management Ratios

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Liquidity Ratios

Current Ratio Curr. Assets / Curr. Liab. 1.30 1.14 1.49 1.35 1.23 1.20 1.19 1.20 1.21 1.23 1.25 Quick Ratio (Cash + Investment + A/R) / Curr. Liab. 0.61 0.53 0.72 0.59 0.56 0.55 0.52 0.51 0.52 0.54 0.56 Cash Ratio (Cash + Cash Equiv.) / Total Curr. Liab. 0.31 0.24 0.34 0.18 0.21 0.21 0.16 0.14 0.15 0.17 0.19 Operating CF Ratio CF from Ops / Current Liabilities 0.25 0.26 0.30 0.35 0.13 0.19 0.18 0.21 0.24 0.24 0.25 Activity or Asset‐Management Ratios Asset Turnover Sales / Total Assets 0.59 0.64 0.64 0.65 0.67 0.69 0.72 0.73 0.73 0.73 0.73 Inventory Conversion Ratio Sales / Inventory 8.39 8.51 7.76 8.23 8.23 8.23 8.23 8.23 8.23 8.23 8.23 Financial Leverage Ratios Debt Ratio Total Liab. / Total Assets 0.59 0.62 0.60 0.58 0.58 0.57 0.56 0.55 0.54 0.53 0.53 Debt To Equity Ratio Total Debt / Total Equity 0.53 0.62 0.60 0.52 0.56 0.56 0.53 0.51 0.49 0.48 0.47 LT Debt To Equity LT Debt / Total Equity 0.50 0.56 0.59 0.51 0.51 0.49 0.48 0.47 0.46 0.45 0.44 Interest Coverage Ratio Net Income / Interest Expense 0.66 (4.01) 1.05 1.53 2.35 2.17 2.42 2.64 2.74 2.77 2.80 Profitability Ratios Profit Margin Analysis Net Income / Sales 0.81% ‐9.92% 1.12% 2.33% 2.91% 2.90% 3.13% 3.27% 3.32% 3.35% 3.36% ROA (DuPont) Net Income / Avg. Total Assets 0.48% ‐6.02% 0.73% 1.50% 2.01% 2.02% 2.29% 2.43% 2.47% 2.49% 2.50% ROE (DuPont) Net Income / Avg. Shareholders' Equity 1.41% ‐19.21% 2.34% 4.39% 5.72% 5.74% 6.41% 6.65% 6.57% 6.47% 6.35% Payout Policy Ratios Payout Ratio DPS / EPS 0.69 (0.06) 0.60 0.32 0.23 0.22 0.19 0.17 0.17 0.16 0.15 Dividend Coverage Net Income / Div. Paid 0.00 (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Payout (Div + Repurchases) / NI 21.01 (1.70) 11.95 5.85 4.31 4.09 3.47 3.16 3.02 2.90 2.79

AA | 27

9.87 9.87

9.87 9.87

9.87 9.87

9.87 9.87

CV Growth ‐0.30% ‐0.20% ‐0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

Cost of Equ

ity

5.60% 11.15 11.18 11.20 11.23 11.26 10.91 10.93 10.95 10.98 11.00 10.67 10.69 10.71 10.73 10.75 10.44 10.46 10.48 10.49 10.51 10.22 10.24 10.25 10.27 10.28 10.01 10.02 10.03 10.04 10.06

11.29 11.02 10.77 10.53 10.29 10.07

11.32 11.35 11.38 11.41 11.44 11.05 11.08 11.10 11.13 11.16 10.79 10.82 10.84 10.86 10.88 10.55 10.56 10.58 10.60 10.62 10.31 10.32 10.34 10.35 10.37 10.08 10.09 10.10 10.11 10.13

5.70% 5.80% 5.90% 6.00% 6.10% 6.19% 9.82 9.83 9.84 9.85 9.86 9.87 9.87 9.88 9.89 9.90 9.91 6.30% 9.61 9.61 9.62 9.63 9.63

9.42 9.42 9.42 9.43 9.43 9.23 9.23 9.23 9.23 9.24 9.05 9.05 9.05 9.05 9.05 8.87 8.87 8.87 8.87 8.87

9.64 9.43 9.24 9.05 8.86

9.64 9.65 9.66 9.66 9.67 9.44 9.44 9.44 9.45 9.45 9.24 9.24 9.24 9.24 9.24 9.05 9.04 9.04 9.04 9.04 8.86 8.86 8.85 8.85 8.84

6.40% 6.50% 6.60% 6.70%

CV Growth ‐0.30% ‐0.20% ‐0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

COGS

% Sales

74.00% 25.88 26.04 26.20 26.37 26.54 22.75 22.87 23.01 23.14 23.28 19.61 19.71 19.81 19.92 20.03 16.48 16.55 16.62 16.70 16.77 13.35 13.39 13.43 13.47 13.52

26.71 23.43 20.14 16.85 13.56

26.90 27.08 27.28 27.48 27.69 23.57 23.73 23.89 24.05 24.22 20.25 20.37 20.49 20.62 20.75 16.93 17.02 17.10 17.19 17.28 13.61 13.66 13.71 13.76 13.81

76.00% 78.00% 80.00% 82.00% 84.25% 9.82 9.83 9.84 9.85 9.86 9.87 9.87 9.88 9.89 9.90 9.91 85.00% 8.65 8.64 8.64 8.64 8.64

7.86 7.85 7.84 7.83 7.82 7.08 7.06 7.05 7.03 7.01 5.51 5.48 5.45 5.42 5.38 3.95 3.90 3.85 3.80 3.75 2.38 2.32 2.26 2.19 2.13

8.63 7.81 6.99 5.34 3.70 2.06

8.63 8.62 8.62 8.61 8.61 7.80 7.78 7.77 7.76 7.74 6.97 6.95 6.92 6.90 6.87 5.31 5.27 5.23 5.18 5.14 3.65 3.59 3.53 3.47 3.40 1.99 1.91 1.83 1.75 1.67

85.50% 86.00% 87.00% 88.00% 89.00%

Cost of Debt 5.50% 5.60% 5.70% 5.80% 5.90% 5.95% 6.00% 6.10% 6.20% 6.30% 6.40%

Cost of Equ

ity

5.60% 11.54 11.48 11.43 11.37 11.31 11.27 11.22 11.16 11.11 11.05 11.01 10.96 10.90 10.85 10.80 10.76 10.71 10.66 10.61 10.55 10.52 10.47 10.42 10.37 10.32 10.29 10.24 10.19 10.14 10.09

11.29 11.02 10.77 10.53 10.29 10.07

11.26 11.20 11.15 11.09 11.04 11.00 10.94 10.89 10.83 10.78 10.75 10.69 10.64 10.59 10.53 10.50 10.45 10.40 10.35 10.30 10.27 10.22 10.17 10.12 10.07 10.04 9.99 9.94 9.89 9.85

5.70% 5.80% 5.90% 6.00% 6.10%

6.192% 10.08 10.04 9.99 9.94 9.89 9.87 9.84 9.79 9.75 9.70 9.65 6.30% 9.85 9.80 9.76 9.71 9.66

9.64 9.60 9.55 9.50 9.46 9.44 9.40 9.35 9.30 9.26 9.25 9.20 9.16 9.11 9.07 9.06 9.01 8.97 8.93 8.88

9.64 9.43 9.24 9.05 8.86

9.61 9.57 9.52 9.47 9.43 9.41 9.37 9.32 9.27 9.23 9.21 9.17 9.13 9.08 9.04 9.02 8.98 8.94 8.89 8.85 8.84 8.80 8.76 8.71 8.67

6.40% 6.50% 6.60% 6.70%

CV Growth ‐0.30% ‐0.20% ‐0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

CapEx Griowth

3.40% 9.86 9.87 9.88 9.89 9.90 9.85 9.86 9.87 9.88 9.89 9.85 9.85 9.86 9.87 9.88 9.84 9.85 9.85 9.86 9.87 9.83 9.84 9.85 9.85 9.86

9.91 9.90 9.89 9.88 9.87

9.92 9.93 9.94 9.95 9.96 9.91 9.92 9.93 9.94 9.95 9.90 9.91 9.92 9.93 9.94 9.89 9.90 9.91 9.92 9.93 9.88 9.89 9.90 9.91 9.92

3.50% 3.60% 3.70% 3.80% 3.88% 9.82 9.83 9.84 9.85 9.86 9.87 9.87 9.88 9.89 9.90 9.91 3.90% 9.82 9.83 9.84 9.85 9.85

9.81 9.82 9.83 9.84 9.85 9.80 9.81 9.82 9.83 9.84 9.79 9.80 9.81 9.82 9.83 9.79 9.79 9.80 9.81 9.82 9.78 9.79 9.79 9.80 9.81

9.86 9.85 9.85 9.84 9.83 9.82

9.87 9.88 9.89 9.90 9.91 9.86 9.87 9.88 9.89 9.90 9.85 9.86 9.87 9.88 9.89 9.84 9.85 9.86 9.87 9.88 9.83 9.84 9.85 9.86 9.87 9.83 9.83 9.84 9.85 9.86

4.00% 4.10% 4.20% 4.30% 4.40%

Equity Risk Premium 4.20% 4.30% 4.40% 4.50% 4.60% 4.62% 4.70% 4.80% 4.90% 5.00% 5.10%

Beta

0.200 18.03 17.91 17.80 17.68 17.57 15.83 15.69 15.55 15.41 15.28 14.05 13.89 13.74 13.60 13.45 12.57 12.42 12.26 12.11 11.96 11.34 11.18 11.02 10.87 10.72

17.55 15.25 13.42 11.93 10.69

17.46 17.35 17.24 17.13 17.02 15.15 15.02 14.89 14.77 14.64 13.31 13.17 13.03 12.90 12.77 11.82 11.67 11.53 11.40 11.26 10.58 10.43 10.29 10.16 10.02

0.30 0.400 0.50

0.600 0.68 10.51 10.35 10.19 10.04 9.89 9.87 9.75 9.61 9.47 9.33 9.20 0.80 9.39 9.24 9.08 8.94 8.79

8.61 8.46 8.31 8.17 8.03 7.93 7.78 7.64 7.50 7.36 7.33 7.19 7.05 6.91 6.78 6.80 6.66 6.52 6.39 6.26 6.33 6.19 6.06 5.93 5.81

8.76 8.00 7.33 6.75 6.24 5.78

8.65 8.51 8.38 8.25 8.12 7.89 7.75 7.62 7.50 7.37 7.23 7.10 6.97 6.85 6.73 6.65 6.52 6.40 6.29 6.17 6.14 6.02 5.90 5.79 5.68 5.69 5.57 5.46 5.35 5.25

0.90 1.00 1.10 1.20 1.30

CV Growth ‐0.30% ‐0.20% ‐0.10% 0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

SGA % Sales

3.70% 10.65 10.67 10.69 10.70 10.72 10.74 10.75 10.77 10.79 10.81 10.83 3.80% 10.49 10.50 10.52 10.53 10.55 10.57 10.58 10.60 10.61 10.63 10.65 3.90% 10.33 10.34 10.35 10.37 10.38 10.40 10.41 10.42 10.44 10.45 10.47 4.00% 10.16 10.18 10.19 10.20 10.21 10.22 10.24 10.25 10.26 10.27 10.29 4.10% 10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.09 10.10 10.11 4.21% 9.82 9.83 9.84 9.85 9.86 9.87 9.87 9.88 9.89 9.90 9.91 4.30% 9.68 9.68 9.69 9.70 9.70 9.71 9.72 9.73 9.73 9.74 9.75 4.40% 9.51 9.52 9.52 9.53 9.54 9.54 9.55 9.55 9.56 9.56 9.57 4.50% 9.35 9.35 9.36 9.36 9.37 9.37 9.37 9.38 9.38 9.38 9.39 4.60% 9.19 9.19 9.19 9.19 9.20 9.20 9.20 9.20 9.20 9.20 9.21 4.70% 9.02 9.03 9.03 9.03 9.03 9.03 9.03 9.03 9.03 9.03 9.02 4.80% 8.86 8.86 8.86 8.86 8.86 8.86 8.86 8.85 8.85 8.85 8.84

Dividend Yield 1.00% 1.05% 1.10% 1.15% 1.20% 1.27% 1.30% 1.35% 1.40% 1.45% 1.50%

Cost of Equ

ity

5.60% 11.29 11.29 11.29 11.29 11.29 11.02 11.02 11.02 11.02 11.02 10.77 10.77 10.77 10.77 10.77 10.53 10.53 10.53 10.53 10.53 10.29 10.29 10.29 10.29 10.29 10.07 10.07 10.07 10.07 10.07

11.29 11.02 10.77 10.53 10.29 10.07

11.29 11.29 11.29 11.29 11.29 11.02 11.02 11.02 11.02 11.02 10.77 10.77 10.77 10.77 10.77 10.53 10.53 10.53 10.53 10.53 10.29 10.29 10.29 10.29 10.29 10.07 10.07 10.07 10.07 10.07

5.70% 5.80% 5.90% 6.00% 6.10%

6.192% 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 6.30% 9.64 9.64 9.64 9.64 9.64

9.43 9.43 9.43 9.43 9.43 9.24 9.24 9.24 9.24 9.24 9.05 9.05 9.05 9.05 9.05 8.86 8.86 8.86 8.86 8.86

9.64 9.43 9.24 9.05 8.86

9.64 9.64 9.64 9.64 9.64 9.43 9.43 9.43 9.43 9.43 9.24 9.24 9.24 9.24 9.24 9.05 9.05 9.05 9.05 9.05 8.86 8.86 8.86 8.86 8.86

6.40% 6.50% 6.60% 6.70%

WACC 4.80% 4.90% 5.00% 5.10% 5.20% ##### 5.40% 5.50% 5.60% 5.70% 5.80%

CV Growth

‐0.30% 9.82 9.82 9.82 9.82 9.82 9.83 9.83 9.83 9.83 9.83 9.84 9.84 9.84 9.84 9.84 9.85 9.85 9.85 9.85 9.85 9.86 9.86 9.86 9.86 9.86

9.82 9.83 9.84 9.85 9.86

9.82 9.82 9.82 9.82 9.82 9.83 9.83 9.83 9.83 9.83 9.84 9.84 9.84 9.84 9.84 9.85 9.85 9.85 9.85 9.85 9.86 9.86 9.86 9.86 9.86

‐0.20% ‐0.10% 0.00% 0.10% 0.20% 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 9.87 0.30% 9.87 9.87 9.87 9.87 9.87

9.88 9.88 9.88 9.88 9.88 9.89 9.89 9.89 9.89 9.89 9.90 9.90 9.90 9.90 9.90 9.91 9.91 9.91 9.91 9.91 9.92 9.92 9.92 9.92 9.92

9.87 9.88 9.89 9.90 9.91 9.92

9.87 9.87 9.87 9.87 9.87 9.88 9.88 9.88 9.88 9.88 9.89 9.89 9.89 9.89 9.89 9.90 9.90 9.90 9.90 9.90 9.91 9.91 9.91 9.91 9.91 9.92 9.92 9.92 9.92 9.92

0.40% 0.50% 0.60% 0.70% 0.80%

AA | 28

Alcoa Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV Cost of Debt 5.95% WACC 5.30%

NOPLAT Revenue 23,700 23,032 23,906 23,574 25,654 27,136 29,624 31,104 32,074 33,218 34,406

COGS 20,401 19,286 19,137 19,861 21,614 22,862 24,959 26,205 27,023 27,986 28,987 Depreciation 1,378 1,348 1,288 986 1,010 1,037 1,065 1,096 1,128 1,162 1,198 Amortization on Intangibles 82 73 83 83 74 65 58 51 46 41 36 SG&A Expense 997 1,008 995 992 1,080 1,142 1,247 1,309 1,350 1,398 1,448 R&D Expense 197 192 218 200 218 231 252 264 273 282 292 Implied Interest on Operating Leases 41 37 35 41 42 44 46 47 49 51 53

EBITA 686 1,162 2,220 1,492 1,701 1,842 2,089 2,225 2,305 2,400 2,498 Provision for Tax Expense 162 428 320 259 351 370 436 479 502 523 544

Tax Shield on Interest Expense 29 27 28 31 28 32 34 34 34 35 36 Tax on Other Income, net (119) (9) 15 37 30 35 38 37 37 40 44 Tax on Impairment of Goodwill ‐ 601 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Tax on Restructuring / Other Charges 60 271 377 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Tax Shield on Operating Leases 14 13 11 13 14 14 15 15 16 16 17 Marginal Tax Rate 34.9% 34.7% 32.3% 32% 32% 32% 32% 32% 32% 32% 32%

Adjusted taxes (15) 903 432 82 71 81 86 86 87 91 97 Change in Def. Taxes (179) 549 357 617 (648) (130) (461) (301) (159) (149) (147)

NOPLAT 685 1,236 2,465 2,286 1,333 2,002 1,978 2,318 2,560 2,682 2,797

INVESTED CAPITAL

Operating Assets "Normal" Cash 415 403 418 413 449 475 518 544 561 581 602 Short-Term Receivables 1,399 1,221 1,395 1,551 1,688 1,786 1,949 2,047 2,110 2,186 2,264 Other receivables 340 597 733 549 598 632 690 725 747 774 802 Inventories 2,825 2,705 3,082 2,864 3,117 3,297 3,599 3,779 3,897 4,036 4,180

Prepaid expenses and other current assets less derivatives contracts 1,275 1,009 1,182 1,070 1,165 1,232 1,345 1,412 1,456 1,508 1,562 Operating Liabilities

Accounts Payable 2,702 2,960 3,152 2,669 2,904 3,072 3,353 3,521 3,631 3,760 3,895 Income Tax Payable 366 376 348 281 382 402 474 521 545 569 592 Accrued compensation and retirement costs 1,058 1,013 937 979 1,066 1,127 1,231 1,292 1,332 1,380 1,429 Other Current Liabilities 1,298 1,044 1,021 1,148 1,249 1,321 1,442 1,515 1,562 1,617 1,675

Operating Working Capital 372 81 879 1,371 1,416 1,499 1,602 1,659 1,702 1,759 1,819 Net PPE 18,947 17,639 16,426 16,840 17,284 17,758 18,262 18,796 19,362 19,960 20,590 Other Noncurrent Assets 2,712 2,628 2,759 2,748 2,749 2,761 2,784 2,815 2,856 2,904 2,960 Environmental Remediation 458 461 473 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Long Term Accrued compensation and retirement costs 322 342 346 334 364 385 420 441 455 471 488 Net Intangibles (Excluding Goodwill) 407 399 737 654 580 515 457 406 360 319 283 PV of Operating Leases 633 682 686 709 737 766 796 827 859 893 928

Deferred Revenues 438 258 155 285 310 328 358 376 388 402 416 Total Invested Capital 21,853 20,368 20,513 21,703 22,093 22,587 23,122 23,686 24,296 24,962 25,676

NOPLAT

1,236

2,465

2,286

1,333

2,002

1,978

2,318

2,560

2,682

2,797

Beg. Invested Capital 21,853 20,368 20,513 21,703 22,093 22,587 23,122 23,686 24,296 24,962 ROIC 5.65% 12.10% 11.14% 6.14% 9.06% 8.76% 10.02% 10.81% 11.04% 11.21%

Invested Capital Current Year 20,368 20,513 21,703 22,093 22,587 23,122 23,686 24,296 24,962 25,676 Invested Capital Previous Year 21,853 20,368 20,513 21,703 22,093 22,587 23,122 23,686 24,296 24,962 FCF 2,720.25 2,319.74 1,096.04 943.15 1,507.66 1,442.61 1,753.83 1,949.62 2,016.06 2,082.90

Beg. Invested Capital 21,852.75 20,368.06 20,513.36 21,703.17 22,092.58 22,586.56 23,121.93 23,685.76 24,296.24 24,962.24 ROIC 5.65% 12.10% 11.14% 6.14% 9.06% 8.76% 10.02% 10.81% 11.04% 11.21% WACC 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% EP 77.54 1,385.69 1,198.80 182.47 830.91 781.06 1,092.38 1,304.93 1,394.55 1,474.35

AA | 29

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Fiscal Years Ending Dec. 31 Leases



2015 205 2014 198 2013 198 2016 172 2015 165 2014 155 2017 131 2016 135 2015 127 2018 101 2017 103 2016 102 2019 79 2018 80 2017 77 Thereafter 165 Thereafter 244 Thereafter 520 Total Minimum Payments 853 Less: Interest 144

Total Minimum Payments 925 Less: Interest 173

Total Minimum Payments 1179 Less: Interest 295

PV of Minimum Payments 709 PV of Minimum Payments 752 PV of Minimum Payments 884

Capitalization of Operating Leases

Pre‐Tax Cost of Debt

5.95%

Capitalization of Operating Leases Pre‐Tax Cost of Debt

5.95%

Capitalization of Operating Leases Pre‐Tax Cost of Debt

5.95% Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 3.1 Number Years Implied by Year 6 Payment 6.8

Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 205 193.5 1 198 186.9 1 198 186.9 2 172 153.2 2 165 147.0 2 155 138.1 3 131 110.1 3 135 113.5 3 127 106.8 4 101 80.2 4 103 81.7 4 102 80.9 5 79 59.2 5 80 59.9 5 77 57.7 6 & beyond 79 113.1 6 & beyond 80 162.8 6 & beyond 77 313.2 PV of Minimum Payments 709.3 PV of Minimum Payments 751.8 PV of Minimum Payments 883.6

AA | 30

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 32 Average Time to Maturity (years): 6.41 Expected Annual Number of Options Exercised: 5

Current Average Strike Price:

$ 11.26

Cost of Equity: 6.19% Current Stock Price: $7.99

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022CV

Increase in Shares Outstanding: 5 5 5 5 5 5 5 5 Average Strike Price: $ 11.26 $ 11.26 $ 11.26 $ 11.26 $ 11.26 $ 11.26 $ 11.26 $ 11.26 Increase in Common Stock Account: 56 56 56 56 56 56 56 56

Change in Treasury Stock 0 0 0 0 0 0 0 0 Expected Price of Repurchased Shares: $ 7.99 $ 8.48 $ 9.01 $ 9.57 $ 10.16 $ 10.79 $ 11.46 $ 12.17 Number of Shares Repurchased: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Shares Outstanding (beginning of the year) 1,217 1,310 1,315 1,320 1,325 1,330 1,335 1,340 Plus: Shares Issued Through ESOP 5 5 5 5 5 5 5 5 Less: Shares Repurchased in Treasury ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Shares Outstanding (end of the year) 1,310 1,315 1,320 1,325 1,330 1,335 1,340 1,345

AA | 31

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AA Current Stock Price $7.99 Risk Free Rate 3.06% Current Dividend Yield 1.27% Annualized St. Dev. of Stock Returns 32.53% 3‐Week Average

Range of

Number

Average Exercise

Average Remaining

B‐S Option

Value of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 32 11.26 6.41 $ 1.81 $ 58 Total 32 $ 11.26 6.41 $ 2.15 $ 58

hawkeye pride alcoa, inc. (nyse: aa)alcoa inc. (nyse: aa) is a global leader in lightweight metals...

Documents