Moody’s Down on Alcoa – Analyst Blog

Rating agency Moody’s Investors Service (MCO) has reaffirmed its “Baa3” rating on Alcoa Inc.’s (AA) Australian affiliate and assigned a “Negative” outlook, reports AP. Moody’s judges obligations rated “Baa” to have moderate credit risk. The agency considers such debt as medium-grade.

 

Alcoa’s debt-equity ratio has hovered around 60% in 2009, with return on equity being consistently negative. Moody’s is skeptic on Alcoa’s high inventories and the possible decline in aluminum prices. The rating agency’s negative outlook on the stock reflects the irregular recovery in the aluminum markets.

 

The recession during 2009 left a severe impact on the automobile and construction industry, the major consumer segment for Alcoa’s aluminum output. With a sharp decline in demand, the company was forced to shut down operation and sell non-core businesses. However, 2010 has showed signs of improvement. Moody’s is hopeful that Alcoa’s end markets would recover and rebuild the lost demand in the aluminum industry.

 

Moody’s is also positive on Alcoa’s cost control strategies and the strong market position in alumina and bauxite. The rating agency expects the company to generate considerable cost synergies, which would drive results at its business heads.

 

Alcoa operates under four major heads − Flat-Rolled Products, Primary Metals, Engineered Products & Solutions, and Alumina. The principal business of Alcoa’s Flat-Rolled Products segment is the production of aluminum plate, sheet, foil and hard alloy extrusions, which serve the packaging and consumer, transportation, building and construction, distribution, aerospace and automotive markets.

 

Alcoa’s Engineered Products & Solutions segment is engaged in the production of titanium, aluminum and super alloy investment castings, forgings and fasteners, aluminum wheels, integrated aluminum structural systems and architectural extrusions serving the aerospace, automotive, building and construction, commercial transportation and power generation markets.

 

Alcoa also has bauxite-mining interests in Australia, Brazil, Guinea, Jamaica and Suriname. It has a collaboration agreement with CIMC Vehicle (Shandong) Co. Ltd. to design and develop an aluminum fuel tanker trailer for the Asian market, besides a strategic cooperation agreement with the Peoples Government of Henan Province in China to jointly establish projects for the fabricated and primary aluminum industry.

 

Markets reacted negatively to the Moody’s “Negative” outlook on Alcoa. Shares of Alcoa fell 7 cents to $14.37 in afternoon trading post the announcement.