final report

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Analysts Jay Miller [email protected] Zach Monroe [email protected] Company Overview Alcoa Inc. (AA) is a global industry leader in engineering and manufacturing lightweight metals. Alcoa specializes in producing multi-material goods including aluminum, titanium, and nickel. Their products are used in various industries across the board: aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. Best known for its aluminum production, Alcoa participates in mining, refining, and smelting the commodity. The US and Europe comprise of 81% of all Alcoa sales (55% & 26% respectively), however, their business spans across 30 countries including Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi Arabia.21

Stock Performance Highlights 52 Week High $33.93 52 Week Low $20.22 Beta Value 1.72 Share Highlights Market Capitalization $10.1bn Shares Outstanding 438mm Book Value per Share $33.64 EPS -$0.31 Forward P/E 94.5 Company Performance Highlights ROA FY ’15 -5.87 ROE FY ’15 -2.23 Sales FY’15 $22,543 Bn

Year to Date Stock Performance:

Source: Bloomberg The chart above shows Alcoa’s YTD performance vs the S&P 500. Alcoa has outperformed the S&P, gaining 39.45% on the year.

Repositioned to Rebound

Alcoa will continue to cut costs of their upstream operations, limiting their exposure to fluctuating aluminum prices and increasing their gross margin.

Alcoa’s increasingly diverse revenue streams will prevent it from over relying on one business segment.

The US Dollar’s anticipated appreciation

against foreign currency will cause Alcoa to incur additional costs including capital expenditure in US Dollars

Alcoa’s downstream innovation will continue to capture market demand from the automotive and aerospace industries.

As a company that operates in the material

industry, Alcoa will remain vulnerable to changes in GDP growth.

Krause Fund Research Fall 2016 Materials

Recommendation: HOLD October 31st, 2016

Alcoa Corporation (NYSE: AA)

Current Price: $28.72 Target Price: $30 - $34

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We are initiating a hold rating for Alcoa Corporation (AA) for the Krause Fund Portfolio. The current share price is trading at $28.72, but we believe this is slightly below the true intrinsic value of the stock. According to our discounted cash flow model and economic value calculations, we forecast share price to reach $34.42. Our relative price to sales valuation priced Alcoa’s intrinsic value at $34.11. Due to Alcoa’s low dividend payout we believe our dividend discount model’s valuation of $11.68 can be overlooked. We anticipate Alcoa will continue to rebound from a rough 2015 and create long-term growth for our portfolio.

GROSS DOMESTIC PRODUCT

Materials are highly dependent on the health of the overall economy. It is vital that the economy is growing in order for materials companies to be lucrative. As GDP per capita grows, demand from end market consumers increase. As a result, more materials will be used in the production of roads, buildings, factories, planes, automobiles and other industrial production uses.1 Supply and demand ultimately determine the price and volume of materials sold and consequently the sales and profits of materials firms. Supply is relatively fixed because the materials sector is very capital intensive and it can take years to get a new mine or refinery to be up and running. On the other hand, supply surplus can result in the closing of factories in order to decrease production in an attempt to stabilize aluminum prices. Demand as well is highly correlated with economic growth. Materials companies better capture the demand of end-markets including commercial construction, transportation, aerospace, and automotive when the economy is experiencing growth.1

In 2009, after the US GDP fell over 2.77%, real GDP growth in the United States has fallen relatively flat. In the United States, the Compound Annual Growth Rate (CAGR) of GDP over the last 10 years has been roughly 2.6% and average yearly GDP

growth over the past 10 years has been a little under 2%. GDP growth has been trending downwards and this year GDP looks to be around 1.7%. Our group predicts GDP growth to be level at around 1.5% in the foreseeable future.4

Source: TradingEconomics.com The chart above shows the US GDP growth rate in the last 10 years.

INTEREST RATES

The materials sector is highly capital intensive. The sector requires large initial cash outflows in order to purchase and develop mining facilities, refineries, smelters, and other big ticket items. The borrowing nature signifies that materials companies are generally highly leveraged and take on large amounts of debt relative to equity. Subsequently, the manner in which materials companies operate make this sector highly cyclical. Large scale operations force companies such as Alcoa to borrow regardless of economic stability. The lower the interest rates, the cheaper the cost of debt is for materials companies. This can fuel large profits in good times and pose as headwinds in economic downturns.1 Interest rates play a large role in the ability for materials companies to be able to take on and pay down debt. Since mines and other large scale projects can take two to ten years to develop, having too much debt with high interest rates can hinder a materials company. Recently, our president elect Donald Trump has claimed that the Federal Reserve has kept the Federal Funds rate too low. He has been outspoken in regards to his dislike for the Federal Reserve’s dovish stance, and has stated he intends on “normalizing” interest

EXECUTIVE SUMMARY

ECONOMIC OUTLOOK

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rates. It is evident that his victory has already affected the 30-year Treasury Yield. We believe the Fed Funds rate will increase 25-50 basis points in the foreseeable future, which could make borrowing slightly more expensive for Alcoa, however, we do not project any substantial rate hikes in the short term and therefore expect the nature of relatively low interest rates to remain a positive for Alcoa.5

Source: CNBC.com The chart above illustrates the 30-yr Treasury Yield performance within the past month. It is clear to see the pop after Donald Trump’s victory.

INFRASTRUCTURE AND CONSTRUCION

Supplementary effects of the victory of Donald Trump are the projected increases on infrastructure in the U.S. He anticipates that spending will reach upwards of $1 Trillion dollars. There is much reason for increased infrastructural spending in the U.S. The American Society of Civil Engineers gave a D+ rating to the quality of U.S infrastructure. Alcoa looks to become a beneficiary of this policy as aluminum products are largely used during infrastructural improvements.10

As seen in the following chart, infrastructure spending has reached a 30-year low. According to the American Society of Civil Engineers, it would cost $3.6 Trillion to improve the country’s overall infrastructure. Federal investment on infrastructure has also declined to .05% of GDP. Originally, federal investment was 1% of GDP.10

Source:BEA.gov The chart above shows the recent decline in U.S. infrastructure spending.

The same can be said for global infrastructure spending. In 2014, the Eurozone spent 2.7% of GDP on infrastructure, down from 3.6% in 2009. The UK similarly decreased their spending to 2.7% from 3.4% during that same period. To keep up with economic growth, researchers estimates that a 0.4% investment increase is needed between now and 2030.11

On the contrary, China, who accounts for over 50% of global aluminum consumption, has been more keen to infrastructure spending in recent years. On average, countries worldwide spend approximately 3.5% of their respective GDP annually. From 2008 to 2013, China has spent roughly 8.8% of their GDP on infrastructure. At this rate, China could afford to cut back their infrastructural spending by 3.3 percentage points and still meet their standards by 2030. Furthermore, large economies such as Japan could also cut back spending by 1.5% and remain on track until 2030.11 This type of spending could be crucial for Alcoa.

Other countries are still falling behind despite significant efforts to ramp up infrastructure spending. For example, India has spent 5.2% of their GDP on infrastructure, which is well above the global average, yet analysts estimate that they need to boost spending by an additional 1.5% to meet demand between now and 2030. Likewise, South Africa has invested about 4.7% of their GDP, but still remain 1.2% below analyst estimates. If India, South Africa, and other emerging markets boost their spending to meet infrastructural standards, it will bode well for Alcoa.

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Source: WSJ.com The chart above displays the recent downtrend in global infrastructural spending among major economies.11

EXCHANGE RATES

The global nature of Alcoa’s operations exposes the company to foreign currency exchange rate impacts. Both Alcoa’s revenues and expenses can be affected negatively or positively on an annual basis. The changes in the valuation of the U.S. dollar versus currencies that have impacts on Alcoa’s revenues and operations include the Australian dollar, the Brazilian real, and the Canadian dollar.21

Source: TradingEconomics.com The chart above compares US dollar ETF (DXY), to Australian dollar, Brazilian real, and Canadian dollar ETFS. The blue line represents the USD ETF.7

Additionally, the Euro and Norwegian Kroner both have the potential to affect Alcoa’s profitability. Many significant input purchases such as raw materials are bought in these currencies. Generally, once these inputs are bought in foreign currencies, they are then sold in U.S. dollars. Alcoa observes short-term profitability gains when the U.S. dollar

strengthens, however, long-term earnings are adversely affect by a stronger U.S dollar. As the U.S. Dollar strengthens, the cost curve shifts downwards for international smelting facilities, but Alcoa’s domestic cost curve may not follow suit. With global currencies weakening across the board, the U.S. dollar continues to grow relative to other currencies. With the victory of Donald Trump, we believe his proposed trade policies will help continue to strengthen the value of the U.S. Dollar.6

CAPITAL MARKETS OUTLOOK

As discussed previously, we believe interest rates will be rising in the near future. Although this will pose as a headwind for the vast majority of the market and the materials sector due to its capital intensive nature, other industries may view rising interest rates as favorable conditions. Key beneficiaries of rising interest rates will be financials. Big banks such as J.P. Morgan and Wells Fargo are among those that will be rewarded once the rate hike is installed.8

ALUMINUM INDUSTRY BASICS

Alcoa’s operations fall in the Aluminum sub-industry, which falls under the umbrella of the Metals and Mining Industry. The aluminum industry consists of many segments that connect the supply chain. First, Bauxite is mined and processed into aluminum oxide, which is called alumina. The alumina is transported to a plant where it undergoes a highly energy-intensive process called smelting. The smelting process yields raw aluminum, which undergoes a process called rolling that forms it into a specified shape and size.21 Due to the large scope of this operation, companies such as Alcoa gain an advantage by vertically integrating all functions of the supply chain. This allows them to be less sensitive to the price fluctuations of the market price of aluminum by giving them more cost and supply control.2

Alcoa’s vertical integration also provides it with additional revenue streams. They sell bauxite, alumina, and raw aluminum to other downstream producers, and sell excess energy they produce to nearby power companies.21

INDUSTRY OUTLOOK

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Aluminum is traded on London Metal Exchange (LME). Not only does the LME provide a marketplace for the purchase of aluminum, it also controls price stability. The LME facilitates over 700 storage facilities across the world, which gives aluminum producers a market to sell to during periods of oversupply, and gives downstream users a safeguard to purchase aluminum during periods of extreme shortage. The LME aluminum price is considered the global standard for aluminum prices.21

Energy is a large cost component of aluminum production, representing 19% of Alcoa’s total alumina refining production costs and 23% of its aluminum production costs. Alcoa generates 14% of the power used at its smelters and purchases the rest under long-term supply contracts. Coal, hydroelectric power, natural gas, and fuel oil make up the primary energy inputs used for production. 21

INDUSTRY TRENDS

Higher energy costs geographically can have a large impact on operations for aluminum companies. Over the past 6 years, higher energy costs have significantly reduced the amount of aluminum produced in the United States (see graph below).25 Rising energy prices caused Alcoa to close 8 out of its 10 of smelting plants in the United States and focus on its operations in Norway, Iceland, Canada and Saudi Arabia where energy prices are much lower.21

Source: Factset.com The chart above shows the US production of Aluminum from 2006-2015.

In the past, alumina prices were determined as a percentage of aluminum prices. Recently, alumina producers have shifted to using a price index that more accurately prices in raw inputs, demand, and the overall market for alumina. As the graph below

shows, after bottoming out around $200/mt in January, Alumina prices have rebounded to $270/mt. Continued price growth should help the industry moving forward.2

Source: MarketRealist.com

The transportation industry and the construction industry are the two largest consumers of aluminum, making up a respective 26% and 25% share of end use. Upstream companies such as Norwegian Hydro, RUSAL, and Alcoa have opened their own downstream value-added divisions to produce either finished or semi-finished aluminum products that can be directly sold to end users. Interestingly, Alcoa will split their upstream and downstream businesses on November 1st, 2016 in order to give each business more flexibility and to allow the downstream business to realize its higher growth potential.27

Source: Statista.com The chart above illustrates industry demand for Aluminum products.

Two main components of the transportation industry that use aluminum as a key input for their products are the automotive and aerospace sub-industries. The

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performance of these industries are intricately linked to the demand for aluminum. A recent trend in the auto industry is the increase in the amount of aluminum that is used per vehicle. In the past, steel was the main component used in vehicles, however producers are finding that using more aluminum and less steel provides many benefits such as boosting fuel economy, improving vehicle performance, and reducing CO2 emissions. The chart below shows that on average, less than 400 lbs. of aluminum is used per vehicle, however analysists project that number to grow to 547 lbs. by 2025.2

Source: MarketRealist.com

Unfortunately, not all aspects of the auto industry are favorable. The seasonal annual adjusted rate for auto sales (SAAR) is a rate that removes seasonal variations from sales data in order to simplify sales growth comparisons. Currently, the U.S. vehicle SAAR sales are down -0.7% on a year over year basis, with car sales down 11.8%. The silver lining is that truck SAAR sales are up 7.5%, which is good for aluminum demand as trucks require more aluminum for production.24 We recognize that 2015 was a record breaking year for U.S. auto sales, but we see the industry plateauing. Although we do not anticipate sales volume in the auto industry to be a source of growth for aluminum demand, we believe the growth in the amount of aluminum used per vehicle will still provide Alcoa with substantial demand growth.

The aerospace industry is poised to remain a key source of demand for the aluminum industry and Alcoa. Over the next 20 years, passenger traffic is projected to grow at a compound annual growth rate of 4.5%, and freight growth is projected at a 4.0% CAGR over the same time span. From 2015 to 2035, Airbus projects the demand for new aircraft will reach 33,070 units, totaling $5.2 trillion. Also encouraging is that passenger traffic is currently outperforming global GDP growth. As the chart below shows, in June 2016 passenger traffic was up 6.2% year-over-year, which was well above global Real GDP growth of 2.4%.28 We view the growth of the aerospace industry as an integral part of Alcoa’s future.

Source: Airbus.com

China is the world’s leader in aluminum production and consumption, filling their high demand with their own domestic companies. Over the past decade, Chinese companies have increased aluminum exporting, which contributed to a global surplus and caused the LME price of aluminum to fall. Over the past year China increased their infrastructure spending even further, spending $1.3 trillion over the course of one year.20 As a result of the increased domestic demand, Chinese companies reduced their level of aluminum exports, which has helped stabilize global supply and increase the LME price.33 Over the next few years, we predict that infrastructure spending in China will remain strong, which should help keep supply levels stable and demand levels strong. We project the annual aluminum industry demand growth rate to be roughly 4%.2

COMPETITIVE ANALYSIS

Competitive analysis in the aluminum industry was conducted by comparing the price to sales ratio of

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Alcoa’s top 5 competitors. At this time, several of our peers had negative earnings which made it difficult to accurately assess a relative price to earnings analysis. Rio Tinto Alcan, a private division of the Rio Tinto group, known as one of Alcoa’s primary competitors was not included due to its multiple revenue streams. Their metrics would not accurately portray the true sales of their individual aluminum segment. Additionally, as a private company, accurate financials were not readily available.

In relation to Alcoa’s top 5 competitors, Alcoa holds the highest market capitalization at 12.6 Bn closely followed by Aluminum Corporation of China who holds a market cap of 11.4 Bn. The remaining competitors range from .5 Bn - 9.5 Bn. Sales are also broadly dispersed as shown from the figure below. Furthermore, Alcoa’s estimated price to sales ratio falls right in line with its competitors, trading at .52 P/S. The median among the five companies was .67 which then gave Alcoa an implied value of $32.13. This valuation falls right in line with our target price.

Source: Krause Fund Research 2016, FactSet25

The chart above displays Alcoa and its top 5 aluminum competitors. Several of these companies are traded on exchanges outside the U.S., therefore their sales and share prices have been adjusted to US dollars.

Given their 2 year returns, it is clear to see that Alcoa and several of its competitors have experienced significant negative returns. All but Aluminum Corporation of China and Hindalco Industries have seen positive returns. We believe this is due to their geographical situations. Within the past two years China has seen substantial GDP growth. In 2014 their GDP growth rate reported upwards of 8% and roughly 7% in 2015. China’s GDP growth has been decreasing, although growth rates remain at healthy levels coming in at 6.7%.14 India based Hindalco industries has also become a beneficiary of domestic growth. In 2014, India reported GDP growth rates approximately 7.5% and 7% in 2015. India’s growth has also tapered off, but still remains substantial at 6.7%.15

Source: Krause Fund Research 2016, FactSet25

The chart above shows the 2 year returns of Alcoa’s top 5 competitors.

Although Alcoa does not outperform its competitors in these valuations, we believe the company holds key competitive advantages that can spur further growth. By splitting the company into upstream and downstream segments on November 1st, 2016, Alcoa will be able to further capture the end market demand of its downstream segment. These end markets include the automotive and aerospace industries. Additionally, Alcoa’s MicromillTM technology, which will be discussed in further detail, will appeal to automakers as one of the best aluminum innovations in recent years. For the upstream segment, Alcoa will key in on generating revenue growth through their bauxite production. China, who accounts for roughly 50% of the world’s aluminum consumption, is yet to be self-sufficient in mining Bauxite. Their production levels are projected to remain at high levels in the near future which will allow Alcoa to capture this demand. Moreover, the Indonesian government has placed a ban on bauxite mining.16 China, who imported nearly 55 million metric tons of bauxite from Indonesia in 2013, must look elsewhere to obtain the bauxite they need to produce alumina and consequently aluminum.9

PRODUCTS AND MARKETS

Alcoa’s product line is segmented into 5 sections:

Alumina Primary Metals Global Rolled Products Engineered Products and Solutions Transportation and Construction Solution

COMPANY ANALYSIS

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Alcoa’s Alumina segment operations consist of mining Bauxite which is refined into alumina. Alcoa established a joint-venture with Alumina Ltd. named AWAC in order to gain ownership of mines and refineries in Australia. Alcoa has full ownership rights in three Bauxite mines and has equity interest in three others. In 2015 the company mined a total of 45.3 million metric tons of bauxite, making them the world’s largest bauxite miner.24 Alcoa only sold 2mmt of Bauxite to third-party customers, but given their strong position as the world’s largest miner, we expect this to become an additional revenue stream in the future. Below is a map of Alcoa’s mines, with the largest located in Australia with an annual production of 31.7mmt.24

Source: Fool.com17

Upon mining, bauxite is sent to processing plants for refinement. Bauxite is expensive to physically transfer, so it benefits them to have their refineries in close proximity to their mines. Upon refinement, Alcoa either sells the alumina to third-party customers or sells it to their downstream operations at market price. In 2015, the Alumina segment generated sales of $5,142M, with $3,455M (67.2%) sold to third-party customers and the remaining $1,687M (32.8%) sold to Alcoa’s smelting division. Their percentage of sales sold to its smelting segment has decreased in each of the past three years (35.6% in 2014, 40.1% in 2013).24 This is due to management’s objective of curtailing idle capacity. In 2016 they reduced their total idle capacity by 58%, which management is hopeful will lower their position on the cost curve from the 23rd percentile to the 21st percentile.23 Below is a map showing Alcoa’s alumina refining facilities. Alcoa saves on transportation costs by positioning a majority of their alumina refineries near their Bauxite mines.21

Source: Fool.com17

Alcoa’s Primary Metals segment consists of the smelting process that transforms alumina into aluminum. As previously mentioned, smelting is a highly energy and capital-intensive process. On average, it takes Alcoa between 12,900 kwh - 17,000 kwh (kilowatts per hour) to smelt one metric tonne of aluminum, compared to 200 kwh - 260 kwh to refine one metric tonne of alumina.24 Once the aluminum is produced it is either sold to customers and traders on the LME (London Metals Exchange), or sold to downstream segments at market price.23

The company’s Globally Rolled Products (GRPs) represent Alcoa’s midstream operations. Globally Rolled Products include sheet metal, which Alcoa supplies to the automotive industry. Alcoa has expanded several rolling mill factories in US as of late. In 2015, Alcoa completed the expansion of their Tennessee facility in order to produce and supply aluminum sheet to automakers such as Ford, Fiat Chrysler, and General Motors. In its Iowa-based facility, Alcoa has grown their product line in the aerospace and industrial market. Alcoa’s innovative technology has resulted in high performance aluminum which can be installed in wing ribs for planes.24 A key distinction in Alcoa’s global rolled products is its patented MicromillTM process. This process gives the aluminum a microstructure that makes 30% lighter, 40% more formable, and 30% stronger than conventional metal. It also allows a portion of the production time to be reduced from 20 days to just 20 minutes.19 The technology has been applauded throughout the industry and was recently recognized as an R&D 100 Award winner, which is equivalent to

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the “Oscars of Invention.” It was also the main reason Alcoa won the long-term supply contract with Ford.19 We believe this is a major competitive advantage for the company that will allow it to continue to capture the growing demand in the automotive and aerospace industry.

Another portion of Alcoa’s downstream operations stems from Engineered Products and Solutions. This segment consists of titanium, fastening systems & rings, forgings & extrusions, and power & propulsions. These products are primarily produce goods for commercial aerospace & transportation, and power generation end markets. Over 70% of third-party sales from this segment derive from the aerospace market. Due to the European summer slowdown, seasonal sales decrease during the third quarter across all end markets. Within this segment, Alcoa is also involved in oil & gas, industrial products, automotive, and land & sea defense markets through the production of forging and extrusion. In order to attract more sales from the automotive industry, Alcoa invested $22 million to manufacture titanium, nickel, and additive parts to be used for some of the world’s best-selling engines. Additionally, in order to capture aerospace demand, the company acquired Firth Rixson, TITAL, & RTI International and has also expanded facilities in Virginia and Indiana to further innovate and produce improve aerospace parts for its customers.21

The remainder of the downstream operations comes from Alcoa’s Transportation and Construction Solutions products. Primary end markets for the segment include commercial building & construction and commercial transportation. Aluminum is mainly used to produce structural and architectural parts as well as aluminum wheels for commercial vehicles. These are sold directly to consumers through distributors. In Hungary, Alcoa has doubled its wheel manufacturing capacity to produce stronger and eco-friendly aluminum wheels.21

CORPORATE STRATEGY

The nature of Alcoa’s business leaves them highly exposed to fluctuations in the price of aluminum. Because the price of aluminum and the performance of the company go hand in hand, Alcoa is more likely to benefit and observe higher margins when aluminum prices rise, resulting in higher profitability.

Year to date, the aluminum market has observed favorable economic conditions; cash prices are up roughly 14% since January.2

Source: LME.com The chart above illustrates the 1-yr price performance of aluminum

This is a far cry from a year ago, when the LME price sank to approximately $1440 per tonne. Last year’s price fallout was the result of a supply glut caused by Chinese exports flooding the market, in part due to a government-issued subsidy benefit that, following a complaint filed by the U.S. department of trade, has since been ceased.34 Even before the price fallout, Alcoa’s management recognized the need to take action and reduce their exposure to extreme price fluctuations. Their strategy is simple: lower their position on their cost curves in order to improve their margins.21

Energy Cost Reductions

In an effort to move from the 43rd percentile of the aluminum cost curve to the 38th percentile, Alcoa has closed 8 of the 10 existing smelting plants in the US, where energy prices are relatively higher. The US national industrial average price of electricity is $0.0706/kWh, while Chinese smelters are paying $0.050-0.055/kWh. Moving their operations elsewhere has helped their margins. In 2013, energy made up 26% of aluminum production costs, which has been reduced to 23%. Alcoa should continue to improve their margins as they implement capacity cuts at cost-inefficient smelters.18

New Revenue Streams

As mentioned previously, Alcoa’s management has placed a recent emphasis on selling bauxite. Having sold only $71 million to third-part customers in 2015, Alcoa already has secured contracts valued at $370

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million over the next two years. At 37%, bauxite sales have a much higher EBITDA margin than alumina (18.1%) and aluminum (4.8% combined). With the industry shift towards using the new alumina price index, the spotlight will be on bauxite to drive the price. Alcoa is set to capitalize on their favorable bauxite position.2

Breaking Up

On November 1st, 2016, Alcoa will split into two separate companies. The parent company will be named Arconic (ARNC) and will consist of the downstream segments that feature value-added products, while the new upstream company will retain the name Alcoa and focus on the mining, refining, and smelting operations. Management decided that although the vertical integration was an advantage, the upstream division was holding back Arconic’s potential for growth. With the split, Arconic will take virtually all of the company’s $9 billion in debt, which will ease the burden of the new upstream spin off company.2 For the sake of our valuation, we affirm that our projections and analysis were done as if the company would not be splitting up, however we recognize that the split will have potential benefits for each new company.

LIFE CYCLE Having been in existence for over a century, Alcoa is a mature player in the materials industry. Since the 2008 financial crisis Alcoa’s market cap has been volatile, ranging from $9.2 billion in 2012 to $19.2 billion in 2014. Alcoa’s current market cap stands at $12.6 billion.24 This is a primary reason for the split of the company, as Alcoa believes the value-added segment has the potential for more growth, while the focus of the upstream company is to cut costs and focus on driving out third party sales of primary metals.

FINANCIAL SUMMARY Alcoa’s stock is currently priced at $21.44/share. It is currently price near the bottom of its 52 week range of $20.00 - $29.99. The stock’s forward P/E is 94.5. The aluminum industry holds a significantly lower forward P/E of 13.11. In Q1 and Q2 of 2016 Alcoa beat earnings forecasts with net income of $151 M.

This was significantly down from the same period in 2015, but this can be partly attributed to Alcoa’s sale of $1.2 billion worth of assets. This sale of assets has helped Alcoa build up a significant amount of cash ($1.9 billion) as it prepares to reposition itself following the upcoming split of the company into two separate entities. Additionally, Alcoa missed analyst estimates in Q3 by $0.03 after reporting $0.32 a share. Despite the miss, Alcoa’s earnings per share saw a 52% increase year over year.12, 13

MAJOR ACQUISITIONS

Since 2014, Alcoa has acquired three major companies in order to grow their Engineered Products segment, and more specifically their aerospace division.

In 2014, Alcoa acquired Firth Rixson, a jet turbine parts supplier, for $2,995M. The acquisition has helped Alcoa secure 4 supplier contracts with Boeing to produce aerospace parts.29

In 2015, Alcoa acquired TITAL, a European titanium producer with close ties to aerospace manufacturers, for $204M.30

Also in 2015, Alcoa acquired RTI International Metals for $1,500M. RTI is a titanium and specialty metal producer that specializes in aerospace products. With the acquisition, Alcoa gained R&D that specialized in finding 3D printing solutions for their aerospace division.32 In 2016, they announced an increase of $60M towards the R&D division and secured 2 supplier contracts with aerospace manufacturer Airbus.31

These acquisitions helped Alcoa gain a total of over $10B in supplier agreements and helped position Alcoa as a leader in aerospace manufacturing. Sales for the Engineered Products segment grew 27% in 2015, and 6-months sales in 2016 were up 15% over the same time period in the previous year.22,23

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KEY INVESTMENT POSITIVES & NEGATIVES (SWOT ANALYSIS)

Strengths:

Global Presence

Alcoa operates in 30 countries and has over 200 operating locations worldwide. This helps Alcoa distribute risk, encounters new avenues to generate growth, and enrich the global Alcoa brand.25

MicromillTM Technology

Alcoa’s award winning MicromillTM technology has shown to be a competitive advantage for Alcoa. It should continue to help the company lock down supplier contracts.

Diverse Revenue Streams

Alcoa generates revenue from 5 primary business segments preventing overdependence on one or two streams. The diversification of Alcoa’s operating portfolio allows the company to minimize business risk and diversify its customer base.25 Weaknesses:

Domestic Overdependence

In 2015, the US accounted for 55% of all Alcoa sales. An overdependence on United States sales could be of concern to Alcoa. U.S. downturns such a political, economic, or climatic developments could significantly destroy Alcoa’s operations. 25

Opportunities:

Global Aluminum Outlook

The global aluminum outlook has several positive trends. As previously stated, in the US and Canada, aluminum demand grew by 2% and the aluminum demand in transportation spiked 4.6%.

Capturing Automotive Innovations

Analyst estimate that by 2020, 75% of all new pickup trucks in the U.S., Mexico, and Canada will be aluminum-bodied. By 2025, the overall aluminum content in vehicles will increase by roughly 40%. As

automakers turn to aluminum to make their vehicles lighter in order to increase fuel capacity, Alcoa is well-positioned to capture this demand growth.

Positive Aerospace Outlook

By 2034, the total aircraft (both passenger aircrafts and freighter crafts) market is estimated to grow to $4.9 Trillion. We see Alcoa’s increase in aerospace investment as a major strength of their downstream operations. Their investments have secured major supplier contracts and have already increased revenue growth.

Acquisitions

The acquisitions of TITAL, RTI, and Firth Rixson should help Alcoa make distinguished products to better capture the automotive and aerospace industries. Threats:

Foreign Currency Fluctuations

Alcoa is vulnerable to increased expenses as a result of foreign currency exchange rates. The appreciation of the US Dollar over currencies such as the Australian Dollar, British Pound, Euro, Brazilian Real and others could incur additional costs to Alcoa as well as additional capital expenditure costs in US Dollars.

Aluminum Commodity Prices

Alcoa may be exposed to negative commodity prices in times of economic downturns or overproduction among global aluminum producers such as China. If overproduction occurs, pricing pressure can drive aluminum down hurting Alcoa’s margins.

After extensive research, we recommend a HOLD rating on Alcoa. We have conducted discounted cash flow (DCF) and economic profit (EP) valuations which have rendered a stock price of $34.42 indicating that Alcoa is currently undervalued. Agreeably, our price-to-sales

VALUATION ANALYSIS

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relative valuation priced Alcoa at $34.11. Both approaches indicate a current undervaluation of Alcoa. On the contrary, our dividend discount model (DDM) projected a price of just $11.72 indicating a significant overvaluation. The DDM, however, was not as equally critical due to Alcoa’s low dividend payout.

KEY ASSUMPTIONS

Revenue Decomposition

Alcoa Corporation’s sales are made up from 5 revenue streams: Alumina, Primary Metals, Global Rolled Products, Engineered Products & Solutions, and Transportation and Construction Solutions.

Due to the significant amount of upstream facility closures Alcoa’s has made as of late, we forecast Alcoa’s Alumina shipments to decrease by -14.0% in 2016, however with substantial price growth of 25.0%, segment revenue should grow 7.5%. In the long-term horizon we see shipments and price growth stabilizing. We project long term segment revenue growth of 4.5%.

Similarly, in 2016 we expect Primary Metals shipments to decrease -13.0%, with price growth of 9.0%. Overall segment revenue should decrease by -5.2%, which is still much better than the previous year’s decrease of -17.8%. In the long-term, we also see Primary Metals shipments and price growth stabilizing, and project long term segment revenue growth of 6.1%.

As a result of lower upstream metal

production, Global Rolled Products and Transportation & Constructions Solutions segment revenues are forecasted to decrease in 2016 by -7.3% and -5.0%, respectively. Beyond 2016, we expect these segments to be high margin revenue drivers, with long term continuing value growth rates of 3.0% and 4.0%.

Due to strong supplier contracts with Boeing and Airbus, despite the production

cuts to upstream segments we are forecasting Engineered Products and Solutions segment revenue growth of 5.5% in 2016. Long term growth should be stable, as we project continuing value segment growth of 4.0%

In 2016, our model forecasts a decrease in overall revenue of -0.46%, which should rebound in the following year to growth of 8.44%. In the long term, we forecast overall continuing value revenue growth of 4.37%.

Cost of Goods Sold & SGA

In recent years, Alcoa’s management has taken substantial measures to cut cost. In 2014 & 2015, COGS were roughly 80% of Sales. During this time, we saw the initial activities Alcoa took to start their cost cutting plan. Management guidance has been vocal about their aggressive stance to further cut costs. 2016 going forward, we believe COGS will drop to 79% of Sales. Alcoa’s average historical SGA was 4.52% of Sales. We forecasted a slight reduction and brought the percentage down to 4.50%

Weighted Average Cost of Capital We calculated Alcoa’s Weighted Average Cost of Capital to be 7.39%. We first used the Capital Asset Pricing Model (CAPM) to retrieve our Cost of Equity. We used 2-year monthly raw beta from Bloomberg to find our systematic risk. Our risk-free rate was the 30-year Treasury yield taken from Treasury.gov.7, 24

The after-tax cost of debt was arrived at by taking our pre-tax cost of debt found by taking Alcoa’s longest debt maturity yield on FINRA and multiplying this by our marginal tax rate. Cost of preferred stock Class A and Class B were measured by taking Class A and B dividends and Class A and B share prices, respectively. For to find the weight of equity and preferred shares, we calculate the market value of each by taking the share price and multiplying by shares outstanding. For the weight of debt, we added the

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book value of debt, which consisted of the PV of operating leases, and the market value of debt.

Discounted Cash Flow & Economic Profit The Discounted Cash Flow and Economic Profit valuation both projected, after calendar adjustments, a price of $34.42 for Alcoa. This valuation implies a 19.8% increase from Alcoa’s current stock price indicating that the company is undervalued.

Relative Valuation We chose to conduct a price to sales analysis as opposed to a price to earnings analysis for two reasons: In early October, Alcoa completed a 1-3 reverse stock split which skewed its forward P/E. Alcoa’s price to earnings of 94.5 would now be considered an outlier for the aluminum industry average that sits around 13. In addition, several companies have negative earnings making for irrelevant price to earnings valuations. In order to compute price to sales we first took the number of shares outstanding over the projected 2016 Sales of each company to find sales per share. We then took each company’s share price over their respective sales per share to arrive at their final price to sales ratio. Lastly, we took Alcoa’s projected 2016 sales per share and multiplied this by the competitor median. The valuation calculated Alcoa’s price to be $30.65, slightly lower than our DCF. Nonetheless, the valuation indicated that Alcoa was also undervalued.

We conducted several sensitivity analyzations to better understand how our assumptions could impact the price of Alcoa’s stock. We chose what we thought we our most influential assumptions to gauge Alcoa’s price behavior in reaction to changes in these specific assumptions.

Gross Margin Vs Beta We felt it necessary to include gross margin because of managements guidance stating their

aggressive plan to cut costs in the near future. Decreasing the gross margin by a mere 1.5% almost doubled Alcoa’s price. As for beta, we realized the impact WACC had on the price and wanted to break out the WACC’s components to shed light on each part’s impact. This analysis yields a whopping range of $13.08 to $75.79.

PPE as % of Sales Vs Marginal Tax Rate Property, Plant and Equipment was decided on to echo possible changes in Alcoa’s long-term assets. Due to Alcoa’s recent closures of smelting and mining facilities, we wanted to see the impact this would have on Alcoa’s price. The marginal tax rate was analyzed in order to observe price reactions to government regulations. This analysis yielded a smaller range of $28.11 to $40.01

NOPLAT CV Growth Vs ROIC CV Growth NOPLAT CV was measured to gauge how EBITDA and taxes would affect Alcoa’s share price. ROIC CV was tested to understand how the difference between the ROIC CV and the WACC would affect Alcoa’s economic profit and consequently, its share price. This analysis yielded a range of $28.81 to $71.42.

Risk Free Rate Vs Equity Risk Premium The interest rates are one of the largest drivers for Alcoa, and therefore we felt it necessary to understand the impacts of the risk free rate and the equity risk premium. It was clear to see that rising interest rate would negatively impact Alcoa. This analysis yielded a range of $22.93 to $55.22.

Cost of Debt Vs. SG&A % of Sales

Alcoa management has places a lot of emphasis on reducing SG&A, and therefore we felt it necessary to understand the impact of it with respect to our cost of debt. We found that at current levels, a 0.25% decrease in SG&A costs boosts our stock price by approximately 7%, while a 0.32% decrease in the current cost of debt boosts stock price approximately 4%. This analysis yielded a range of $23.38 to $47.35.

SENSITIVITY ANALYSIS

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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.

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References: 1Pyles, Brad W., and Andrew S. Teufel. Fisher Investments on Materials. Hoboken, NJ: John Wiley & Sons, 2009. Print.

2O'Hara, Mark. "Has Alcoa's Split Lived Up to the Hype?" Market Realist. N.p., 08 Nov. 2016. Web.

3Lovelace, Berkeley. "Alcoa Sinks after Earnings, Revenue Fall Short of Expectations." CNBC. N.p., 11 Oct. 2016. Web. 15 Nov. 2016. 4"United States GDP Growth Rate | 1947-2016 | Data | Chart | Calendar." N.p., n.d. Web. 12 Nov. 2016.

5Ip, Greg. "Does Donald Trump Spell an End to Fed's Low-Rate Era? - WSJ - Http://www.wsj.com/articles/does-donald-trump-spell-an-end-to-feds-low-rate-era-1478775604."N.p., 10 Nov. 2016. Web. 15 Nov. 2016.

6Choudhury, Saheli. "Dollar Rises After Donald Trump Clinches Victory; Mexican Peso Plummets." CNBC.com. N.p., 09 Nov. 2016. Web.

6"United States Dollar | 1967-2016 | Data | Chart | Calendar | Forecast." United States Dollar | 1967-2016 | Data | Chart | Calendar | Forecast. N.p., n.d. Web. 15 Nov. 2016.

7"U.S. 30 Year Treasury." U.S. 30 Year Treasury - US30Y - Stock Quotes. N.p., n.d. Web. 15 Nov. 2016.

8Reynolds, Ben. "4 High-Quality Financial Stocks That Will Benefit From Rising Interest Rates." TheStreet. N.p., 20 May 2016. Web. 15 Nov. 2016.

9"Alcoa: Looking Past The Results." Seeking Alpha. N.p., 16 Oct. 2016. Web. 15 Nov. 2016.

10Pianin, Eric. "As Roads Crumble, Infrastructure Spending Hits a 30-Year Low." The Fiscal Times. N.p., 25 Feb. 2016. Web. 15 Nov. 2016.

11Harrison, David. "The World Needs to Boost Infrastructure Spending, but Many Countries Are Cutting Back." WSJ. Wsj.com, 15 June 2016. Web. 15 Nov. 2016.

12"Alcoa Corp (AA) Stock Analysis - GuruFocus.com." GuruFocus.com. N.p., n.d. Web. 15 Nov. 2016.

13"Alcoa Corp." AA Stock Quote - Alcoa Corp. Stock Price Today (AA:NYSE) - MarketWatch. N.p., n.d. Web. 15 Nov. 2016.

14"China GDP Growth Rate | 2010-2016 | Data | Chart | Calendar | Forecast." China GDP Growth Rate | 2010-2016 | Data | Chart | Calendar | Forecast. N.p., n.d. Web. 15 Nov. 2016.

15"India GDP Annual Growth Rate | 1951-2016 | Data | Chart | Calendar." Trading Economics. N.p., n.d. Web. 15 Nov. 2016.

16Rusmana, Yoga. "Indonesia Likely to Keep Ban on Nickel Ore And Bauxite Exports." Bloomberg.com. N.p., 12 Oct. 2016. Web. 12 Nov. 2016.

17Hall, Jason. "How Will a Trump Presidency Affect Alcoa Corporation?" The Motley Fool. N.p., 1970. Web. 15 Nov. 2016. 18Burns, Stuart. "Power Costs in the Production of Primary Aluminum - Steel, Aluminum, Copper, Stainless, Rare Earth, Metal Prices, Forecasting | MetalMiner." Steel Aluminum Copper Stainless Rare Earth Metal Prices Forecasting MetalMiner. N.p., 24 Nov. 2015. Web. 12 Nov. 2016. 19Figueroa, Patricia. "Arconic’s Breakthrough Micromill™ Technology Wins Prestigious 2016 R&D 100 Award." Business Wire. N.p., 10 Nov. 2016. Web.

20Pi, Xiaoqing. "China Trumps Trump When It Comes to Infrastructure." Bloomberg.com. Bloomberg, 13 Nov. 2016. Web. 13 Nov. 2016. 27President, BCG Senior Vice. "Global Aluminum Demand and Supply Growth Rates 2015 | Forecast." Statista. N.p., n.d. Web. 15 Nov. 2016. 28"Global Market Forecast 2016-2035 | Airbus, a Leading Aircraft Manufacturer." Airbus. N.p., n.d. Web. 15 Nov. 2016. 29“Alcoa Acquires Firth Rixson, Grows Global Aerospace Portfolio”. Alcoa Newsroom. Alcoa Corp., 20 Nov. 2014. Web. 30"Alcoa Completes Acquisition of TITAL." Alcoa Online Newsroom. 3 Mar. 2015. Web. 31"Alcoa Signs Contract with Airbus for High-Tech, Multi-Material Fastening Systems." Alcoa Online Newsroom. N.p., 5 Oct. 2015. Web. 32"Alcoa Completes Acquisition of RTI International Metals, Growing Multi-Material Aerospace Portfolio." Alcoa Online Newsroom. N.p., 23 July 2015. Web. 33Mark O'Hara. "How Market Dynamics Impacted Alcoa and Arconic." 8 Nov. 2016. Market Realist. 34"China Ends 'Export Subsidies" But Aluminum Rebate Remains.” MetalMiner. 19 Apr. 2016. Web.

Additional Sources 21Alcoa 10-K, 2015 22Alcoa 10-Q, Q2 2016 23Acloa 10-Q, Q3 2016 24Bloomberg Terminal 25FactSet 26ThomsonOne

Sensitivity Analysis:Beta

34.42$ 1.368 1.484 1.6 1.716 1.832 1.948 2.064

78.25% 75.79 62.07 51.68 43.52 36.95 31.53 26.99

78.50% 71.35 58.23 48.29 40.49 34.20 29.02 24.67

78.75% 66.90 54.38 44.90 37.46 31.45 26.51 22.36

Gross Margin % 79.00% 62.46 50.54 41.51 34.42 28.70 23.99 20.04

79.25% 58.01 46.70 38.12 31.39 25.96 21.48 17.72

79.50% 53.57 42.85 34.73 28.35 23.21 18.96 15.40

79.75% 49.13 39.01 31.34 25.32 20.46 16.45 13.08

Marginal Tax Rate

34.42$ 29.00% 31.00% 33.00% 35.00% 37.00% 39.00% 41.00%

67.84% 40.01 38.37 36.64 34.82 32.93 30.94 28.87

69.92% 39.87 38.23 36.50 34.69 32.79 30.81 28.74

72.00% 39.73 38.09 36.36 34.56 32.66 30.68 28.61

PPE as a % of Revenue 74.08% 39.59 37.95 36.23 34.42 32.53 30.55 28.49

76.16% 39.45 37.81 36.09 34.29 32.40 30.42 28.36

78.24% 39.31 37.67 35.95 34.15 32.27 30.29 28.23

80.32% 39.17 37.53 35.82 34.02 32.13 30.16 28.11

ROIC CV

34.42$ 7.67% 7.88% 8.08% 8.29% 8.50% 8.71% 8.92%

2.28% 28.81 29.28 29.72 30.14 30.54 30.92 31.28

2.96% 29.14 29.84 30.50 31.13 31.73 32.30 32.84

3.64% 29.58 30.60 31.56 32.48 33.35 34.18 34.97

NOPLAT CV Growth 4.32% 30.23 31.70 33.10 34.42 35.68 36.88 38.03

5.00% 31.24 33.43 35.50 37.47 39.35 41.13 42.83

5.68% 33.05 36.52 39.82 42.94 45.92 48.75 51.45

6.36% 37.25 43.70 49.81 55.62 61.15 66.41 71.42

Risk Free Rate

34.42$ 2.58% 2.67% 2.77% 2.86% 2.95% 3.04% 3.13%

4.4% 53.22 51.51 49.87 48.30 46.80 45.35 43.97

4.6% 47.21 45.75 44.35 43.00 41.70 40.46 39.26

4.8% 42.06 40.80 39.59 38.42 37.29 36.20 35.15

Equity Risk Premium 5.0% 37.60 36.51 35.45 34.42 33.43 32.47 31.55

5.2% 33.71 32.74 31.80 30.90 30.02 29.17 28.35

5.4% 30.27 29.41 28.58 27.77 26.99 26.23 25.49

5.6% 27.21 26.45 25.70 24.98 24.28 23.59 22.93

Cost of Debt

34.42$ 3.37% 3.69% 4.00% 4.32% 4.63% 4.95% 5.26%

5.25% 30.03 28.82 27.65 26.53 25.44 24.39 23.38

5.00% 32.80 31.52 30.29 29.11 27.96 26.86 25.79

4.75% 35.62 34.28 32.99 31.74 30.54 29.38 28.26

SG&A % of Sales 4.50% 38.50 37.09 35.73 34.42 33.16 31.94 30.77

4.25% 41.42 39.94 38.51 37.14 35.82 34.55 33.32

4.00% 44.37 42.82 41.33 39.90 38.52 37.19 35.90

3.75% 47.35 45.74 44.18 42.69 41.25 39.86 38.52

Alcoa Inc.

Key Assumptions of Valuation Model

Ticker Symbol AA

Current Share Price $28.72

Current Model Date 10/31/2016

Common Shares Outstanding 438459934

Fiscal Year End Dec. 31

WACC 7.39%

Pre‐Tax Cost of Debt 4.315%

Market Value of Debt 9146045606

Beta 1.716

Risk‐Free Rate 2.86%

Equity Risk Premium 5%

CV Growth of NOPLAT 4.32%

Current Dividend Yield 1.3%

Marginal Tax Rate 35%

Intrinsic Price 34.42$

ROIC CV 8.29%

Cost of Equity 11.44%

Alcoa Inc.Revenue Decomposition

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

SalesAlumina Sales 3326 3509 3455 3714 4055 4219 4389 4543 4738 4966 5191 5428Revenue Growth % 7.6% 5.5% ‐1.5% 7.5% 9.2% 4.0% 4.0% 3.5% 4.3% 4.8% 4.6% 4.5%Alumina Shipments (kmt) 9966 10652 10755 9249 9527 9622 9718 9961 10260 10568 10832 11049Shipment Growth % 7.2% 6.9% 1.0% ‐14.0% 3.0% 1.0% 1.0% 2.5% 3.0% 3.0% 2.5% 2.0%Alumina Price per metric ton 334 329 321 402 426 438 452 456 462 470 479 491Price Growth 0.3% ‐1.3% ‐2.5% 25.0% 6.0% 3.0% 3.0% 1.0% 1.3% 1.8% 2.0% 2.5%

Primary Metals Sales 6596 6800 5591 5302 5949 6556 6415 6605 7075 7579 8002 8489Rev Growth % ‐11.2% 3.1% ‐17.8% ‐5.2% 12.2% 10.2% ‐2.1% 3.0% 7.1% 7.1% 5.6% 6.1%Primary Metals Shipments 2801 2534 2478 2156 2199 2265 2333 2426 2499 2574 2638 2717Shipment Growth % ‐8.3% ‐9.5% ‐2.2% ‐13.0% 2.0% 3.0% 3.0% 4.0% 3.0% 3.0% 2.5% 3.0%Primary Metals Price per metric ton 2355 2684 2256 2459 2705 2895 2750 2722 2831 2945 3033 3124Price Growth % ‐3.2% 14.0% ‐15.9% 9.0% 10.0% 7.0% ‐5.0% ‐1.0% 4.0% 4.0% 3.0% 3.0%

Global Rolled Products Sales 7106 7351 6238 5783 6315 6667 6729 6729 6898 7106 7321 7542Rev Growth % ‐3.7% 3.4% ‐15.1% ‐7.3% 9.2% 5.6% 0.9% 0.0% 2.5% 3.0% 3.0% 3.0%Global Rolled Shipments 1905 1964 1775 1828 1901 1949 2007 2027 2038 2058 2089 2120Shipment Growth % 2.0% 3.1% ‐9.6% 3.0% 4.0% 2.5% 3.0% 1.0% 0.5% 1.0% 1.5% 1.5%Global Rolled price per metric ton 3730 3743 3514 3163 3321 3421 3352 3319 3385 3453 3505 3557Price Growth % ‐5.6% 0.3% ‐6.1% ‐10.0% 5.0% 3.0% ‐2.0% ‐1.0% 2.0% 2.0% 1.5% 1.5%

Engineered Products & Solutions Sales 5733 6006 5342 5609 5946 6302 6681 7048 7436 7807 8198 8526Growth % 3.8% 4.8% ‐11.1% 5.0% 6.0% 6.0% 6.0% 5.5% 5.5% 5.0% 5.0% 4.0%

Transportation & Construction Solutions Sales ‐‐ ‐‐ 1882 1788 1824 1878 1935 1964 2003 2063 2135 2221Growth % ‐5.0% 2.0% 3.0% 3.0% 1.5% 2.0% 3.0% 3.5% 4.0%

Corporate 271 240 26 235 235 235 235 235 235 235 235 235Total 23032 23906 22534 22431 24323 25857 26384 27124 28385 29756 31082 32440Growth % ‐2.82% 3.79% ‐5.74% ‐0.46% 8.44% 6.31% 2.04% 2.81% 4.65% 4.83% 4.46% 4.37%Percent of Total (%)Global Rolled Products 31 31 28 26% 26% 26% 26% 25% 24% 24% 24% 23%Primary Metals 29 28 25 24% 24% 25% 24% 24% 25% 25% 26% 26%Engineered Products & Solutions 25 25 24 25% 24% 24% 25% 26% 26% 26% 26% 26%Alumina 14 15 15 17% 17% 16% 17% 17% 17% 17% 17% 17%Transportation & Construction Solutions ‐‐ ‐‐ 8 8% 7% 7% 7% 7% 7% 7% 7% 7%Corporate 1 1 0 1% 1% 1% 1% 1% 1% 1% 1% 1%Total 100 100 100 100% 100% 100% 100% 100% 100% 100% 100% 100%

Alcoa Inc.

Income Statement


Scale MIL MIL MIL MIL MIL MIL MIL MIL MIL MIL MIL MIL

Sales 23,032 23,906 22,534 22,431 24,323 25,857 26,384 27,124 28,385 29,756 31,082 32,440

Cost of goods sold 19,286 19,137 18,069 17,720 19,215 20,427 20,843 21,428 22,424 23,507 24,555 25,628

Selling, general administrative & other expenses 1,008 995 979 1,009 1,095 1,164 1,187 1,221 1,277 1,339 1,399 1,460

Research & development expenses 192 218 238 192 208 221 225 232 242 254 265 277

Provision for depreciation, depletion & amortization 1,421 1,371 1,280 1,286 1,395 1,483 1,513 1,555 1,628 1,706 1,782 1,860

Impairment of goodwill 1,731 0 25 0 0 0 0 0 0 0 0 0

Restructuring & other charges 782 1,168 1,195 299 300 302 303 305 306 308 309 311Other income (expenses), net 25 ‐47 ‐2 78 78 78 78 79 79 79 80 80

EBIT ‐1,363 970 746 1,925 2,111 2,261 2,312 2,384 2,507 2,642 2,772 2,905

Interest expense 453 473 498 393 354 401 432 452 452 461 475 490

Income (loss) from continuing operations before income taxes ‐1,816 497 248 1,532 1,757 1,861 1,880 1,932 2,055 2,180 2,296 2,415

Provision (benefit) for income taxes 428 320 445 536 615 651 658 676 719 763 804 845

Net income (loss) ‐2,244 177 ‐197 996 1,142 1,209 1,222 1,256 1,336 1,417 1,493 1,570

Net income (loss) attributable to noncontrolling interests ‐41 91 ‐125 0 0 0 0 0 0 0 0 0

Net income (loss) attributable to Alcoa ‐2,285 268 ‐322 996 1,142 1,209 1,222 1,256 1,336 1,417 1,493 1,570

Year end shares outstanding 357 406 437 439 440 442 444 446 448 448 448 448

Weighted average shares outstanding ‐ basic 1,070 1,162 1,259 438 439 441 443 445 447 448 448 448

EPS ‐ basic (2.14)$ 0.21$ (0.31)$ 2.28$ 2.60$ 2.74$ 2.76$ 2.82$ 2.99$ 3.17$ 3.33$ 3.51$

Dividends per common share 0.36 0.36 0.36 0.38 0.40 0.42 0.44 0.46 0.48 0.51 0.53 0.56

Alcoa Inc.Balance Sheet


Scale MIL MIL MIL MIL MIL MIL MIL MIL MIL MIL MIL MILCash & cash equivalents 1,437 1,877 1,919 2,494 2,964 3,243 3,774 4,173 4,558 4,779 5,175 5,687Receivables from customers, net 1,221 1,395 1,340 1,346 1,459 1,551 1,583 1,627 1,703 1,785 1,865 1,946Other receivables 597 733 522 473 513 546 557 572 599 628 656 684Inventories 2,705 3,082 3,442 2,759 2,992 3,181 3,245 3,337 3,492 3,660 3,823 3,991Prepaid expenses & other current assets 1,009 1,182 730 945 1,025 1,089 1,111 1,143 1,196 1,253 1,309 1,367Total current assets 6,969 8,269 7,953 8,018 8,953 9,610 10,271 10,852 11,547 12,106 12,828 13,675

Properties, plants & equipment, net 17,639 16,426 14,815 16,617 18,019 19,156 19,546 20,094 21,028 22,044 23,026 24,032

Goodwill 3,415 5,247 5,401 5,401 5,401 5,401 5,401 5,401 5,401 5,401 5,401 5,401Investments 1,907 1,944 1,685 1,710 1,709 1,676 1,652 1,711 1,748 1,760 1,750 1,734Deferred income taxes 3,184 2,754 2,668 2,681 2,695 2,708 2,722 2,735 2,749 2,763 2,777 2,790Total other noncurrent assets 2,628 2,759 4,006 4,056 4,107 4,158 4,210 4,263 4,316 4,370 4,425 4,480Assets held for saleTotal assets 35,742 37,399 36,528 38,483 40,883 42,708 43,801 45,056 46,789 48,444 50,207 52,113

Short‐term borrowings 57 54 38 50 54 57 58 60 63 66 69 72Accounts payable, trade 2,960 3,152 2,889 2,434 2,640 2,806 2,863 2,944 3,081 3,230 3,373 3,521Accrued compensation & retirement costs 1,013 937 850 870 937 995 1,020 1,054 1,111 1,177 1,245 1,318Taxes, including taxes on income 376 348 239 401 435 463 472 485 508 532 556 580Other current liabilities 1,044 1,021 1,174 1,445 1,462 1,279 877 999 1,187 1,127 1,095 1,137Long‐term debt due within one year 655 29 21 21 771 1,039 1,140 1,018 1,018 1,018 1,018 1,018Total current liabilities 6,105 5,541 5,211 5,222 6,299 6,640 6,431 6,561 6,967 7,150 7,356 7,647

Long‐term debt, less amount due within one year 7,607 8,769 9,044 8,133 8,457 8,911 9,274 9,406 9,607 9,924 10,261 10,583Accrued pension benefits 3,183 3,291 3,298 3,150 3,008 2,873 2,743 2,620 2,502 2,389 2,282 2,179Accrued other postretirement benefits 2,354 2,155 2,106 2,011 1,921 1,834 1,752 1,673 1,598 1,526 1,457 1,392Total other noncurrent liabilities & deferred credits 2,568 2,519 2,217 2,328 2,525 2,684 2,739 2,815 2,946 3,089 3,226 3,367Deferred income taxes 403 330 521 524 526 529 531 534 537 540 542 545Total liabilities 22,220 22,605 22,397 21,368 22,736 23,471 23,470 23,610 24,158 24,617 25,125 25,712Preferred stock 55 55 55 55 55 55 55 55 55 55 55 55Mandatory convertible preferred stock 3 3 3 3Common Equity 8,687 10,588 11,410 11,475 11,539 11,607 11,672 11,736 11,801 11,806 11,806 11,806Retained earnings 9,272 9,379 8,834 9,664 10,632 11,657 12,685 13,737 14,857 16,047 17,302 18,622Treasury stock, at cost ‐3,762 ‐3,042 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825 ‐2,825Accumulated other comprehensive income (loss) ‐3,659 ‐4,677 ‐5,431 ‐3,342 ‐3,342 ‐3,342 ‐3,342 ‐3,342 ‐3,342 ‐3,342 ‐3,342 ‐3,342Total Alcoa shareholders' equity 10,593 12,306 12,046 15,030 16,062 17,153 18,246 19,361 20,546 21,742 22,997 24,316Noncontrolling interests 2,929 2,488 2,085 2,085 2,085 2,085 2,085 2,085 2,085 2,085 2,085 2,085Total equity 13,522 14,794 14,131 17,115 18,147 19,238 20,331 21,446 22,631 23,827 25,082 26,401

Alcoa Inc.Cash Flow Statement

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Scale MILCash Flows From Operating ActivitiesNet income (loss) 996 1,142 1,209 1,222 1,256 1,336 1,417 1,493 1,570Adjustments to Reconcile Net Income to Net CashDepreciation (+) 1,286 1,395 1,483 1,513 1,555 1,628 1,706 1,782 1,860

Changes (+/‐) In Working Capital AccountChange in A/R (‐) ‐6 ‐114 ‐92 ‐32 ‐44 ‐76 ‐82 ‐80 ‐81Change in Other Recievables (‐) 49 ‐40 ‐32 ‐11 ‐16 ‐27 ‐29 ‐28 ‐29Change in Inventories (‐) 683 ‐233 ‐189 ‐65 ‐91 ‐155 ‐169 ‐163 ‐167Change in Prepaid Expenses & Other Current Assets (‐) ‐215 ‐80 ‐65 ‐22 ‐31 ‐53 ‐58 ‐56 ‐57Change in Accounts Payable (+) ‐455 205 167 57 80 137 149 144 147Change in Accrued Comp(+) 20 66 59 25 34 57 65 68 74Change in Other Current Liabilities (+) 271 18 ‐183 ‐402 122 187 ‐59 ‐32 42Change in Income Taxes Payable (+) 162 34 27 9 13 23 25 24 24Change in Def Tax Assets (‐) ‐13 ‐13 ‐13 ‐14 ‐14 ‐14 ‐14 ‐14 ‐14Change in Def Tax Liabilities (+) 3 3 3 3 3 3 3 3 3

Net Cash Provided by Operating Activities 2,781 2,383 2,373 2,283 2,868 3,045 2,954 3,141 3,371

Cash Flows From Investing ActivitiesCapital Expenditures ‐3,089 ‐2,796 ‐2,619 ‐1,903 ‐2,104 ‐2,562 ‐2,722 ‐2,764 ‐2,866Change in Investments (‐) ‐25 1 33 24 ‐59 ‐37 ‐12 10 16(Increase) Decrease in Other Assets ‐50 ‐51 ‐51 ‐52 ‐53 ‐53 ‐54 ‐55 ‐55

Net Cash Used for Investing Activities ‐3,163 ‐2,846 ‐2,638 ‐1,931 ‐2,215 ‐2,652 ‐2,788 ‐2,809 ‐2,906

Cash Flows From Financing ActivitiesIncrease (Decrease) in ST Borrowings 12 4 3 1 2 3 3 3 3Increase (Decrease) in LT Borrowings ‐911 324 454 363 132 201 317 337 321Increase (Decrease) in LT Debt due within 1 yr 0 750 268 101 ‐122 0 0 0 0Change in Accrued Pension Benefits ‐148 ‐142 ‐135 ‐129 ‐123 ‐118 ‐113 ‐108 ‐103Change in Other post‐retirement benefits ‐95 ‐91 ‐86 ‐83 ‐79 ‐75 ‐72 ‐69 ‐66Other LT Liabilities 111 196 159 55 77 131 142 138 141Payments of dividends ‐165 ‐174 ‐184 ‐194 ‐204 ‐215 ‐227 ‐238 ‐250Proceeds from issuance of common stock 65 65 65 65 65 65 5 0 0 Change in Accum other comprehensive income 2,090 0 0 0 0 0 0 0 0Repurchases of common stock 0 0 0 0 0 0 0 0 0

Net cash provided by financing activities 958 933 543 179 ‐254 ‐9 56 63 47

Change in Cash 575 470 279 532 399 384 222 395 512Beginning Cash Balance 1,919 2,494 2,964 3,243 3,774 4,173 4,558 4,779 5,175

Ending Cash Balance 2,494 2,964 3,243 3,774 4,173 4,558 4,779 5,175 5,687

Alcoa Inc.

Common Size Income Statement


Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost of goods sold 83.74% 80.05% 80.19% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00% 79.00%

Selling, general administrative & other expenses 4.38% 4.16% 4.34% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Research & development expenses 0.83% 0.91% 1.06% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%

Provision for depreciation, depletion & amortization 6.17% 5.73% 5.68% 5.73% 5.73% 5.73% 5.73% 5.73% 5.73% 5.73% 5.73% 5.73%

Impairment of goodwill 7.52% 0.00% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Restructuring & other charges 3.40% 4.89% 5.30% 1.33% 1.23% 1.17% 1.15% 1.12% 1.08% 1.03% 1.00% 0.96%

Interest expense 1.97% 1.98% 2.21% 1.75% 1.46% 1.55% 1.64% 1.67% 1.59% 1.55% 1.53% 1.51%

Other income (expenses), net 0.11% ‐0.20% ‐0.01% 0.35% 0.32% 0.30% 0.30% 0.29% 0.28% 0.27% 0.26% 0.25%

Income (loss) from continuing operations before income taxes ‐7.88% 2.08% 1.10% 6.83% 7.22% 7.20% 7.13% 7.12% 7.24% 7.33% 7.39% 7.44%

Provision (benefit) for income taxes 1.86% 1.34% 1.97% 2.39% 2.53% 2.52% 2.49% 2.49% 2.53% 2.56% 2.59% 2.61%

Income (loss) fr cont opers bef minority interest share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Less: minority interests' share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Income (loss) from discontinued operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) ‐7.39% 0.58% ‐0.65% 3.28% 3.76% 3.98% 4.02% 4.13% 4.40% 4.67% 4.91% 5.17%

Net income (loss) attributable to noncontrolling interests ‐0.18% 0.38% ‐0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) attributable to Alcoa ‐9.92% 1.12% ‐1.43% 4.44% 4.69% 4.68% 4.63% 4.63% 4.71% 4.76% 4.80% 4.84%

Alcoa Inc.Common Size Balance Sheet


Cash & cash equivalents 6.24% 7.85% 8.52% 11.12% 12.19% 12.54% 14.31% 15.39% 16.06% 16.06% 16.65% 17.53%Receivables from customers, net 5.30% 5.84% 5.95% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Other receivables 2.59% 3.07% 2.32% 2.11% 2.11% 2.11% 2.11% 2.11% 2.11% 2.11% 2.11% 2.11%Inventories (Sum of 11‐15) 11.74% 12.89% 15.27% 12.30% 12.30% 12.30% 12.30% 12.30% 12.30% 12.30% 12.30% 12.30%Fair value of derivative contracts 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other curren 4.38% 4.94% 3.24% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21% 4.21%Total current assets 30.26% 34.59% 35.29% 35.74% 36.81% 37.16% 38.93% 40.01% 40.68% 40.69% 41.27% 42.15%

Properties, plants & equipment 76.58% 68.71% 65.75% 74.08% 74.08% 74.08% 74.08% 74.08% 74.08% 74.08% 74.08% 74.08%Goodwill 14.83% 21.95% 23.97% 24.08% 22.21% 20.89% 20.47% 19.91% 19.03% 18.15% 17.38% 16.65%Investments 8.28% 8.13% 7.48% 7.62% 7.02% 6.48% 6.26% 6.31% 6.16% 5.91% 5.63% 5.35%Deferred income taxes 13.82% 11.52% 11.84% 11.95% 11.08% 10.47% 10.32% 10.08% 9.68% 9.28% 8.93% 8.60%Total other noncurrent assets 11.41% 11.54% 17.78% 18.08% 16.88% 16.08% 15.96% 15.72% 15.21% 14.69% 14.24% 13.81%Total assets 155.18% 156.44% 162.10% 171.56% 168.09% 165.17% 166.02% 166.11% 164.84% 162.80% 161.53% 160.64%

Short‐term borrowings 0.25% 0.23% 0.17% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22% 0.22%Accounts payable, trade 12.85% 13.18% 12.82% 10.85% 10.85% 10.85% 10.85% 10.85% 10.85% 10.85% 10.85% 10.85%Accrued compensation & retirem 4.40% 3.92% 3.77% 3.88% 3.85% 3.85% 3.87% 3.89% 3.92% 3.95% 4.00% 4.06%Taxes, including taxes on income 1.63% 1.46% 1.06% 1.79% 1.79% 1.79% 1.79% 1.79% 1.79% 1.79% 1.79% 1.79%Other current liabilities 4.53% 4.27% 5.21% 6.44% 6.01% 4.95% 3.32% 3.68% 4.18% 3.79% 3.52% 3.50%Long‐term debt due within one y 2.84% 0.12% 0.09% 0.09% 3.17% 4.02% 4.32% 3.75% 3.59% 3.42% 3.28% 3.14%Total current liabilities 26.51% 23.18% 23.13% 23.28% 25.90% 25.68% 24.37% 24.19% 24.55% 24.03% 23.67% 23.57%Commercial paper 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Long‐term debt, less amount du 33.03% 36.68% 40.13% 36.26% 34.77% 34.46% 35.15% 34.68% 33.85% 33.35% 33.01% 32.62%Accrued pension benefits 13.82% 13.77% 14.64% 14.04% 12.37% 11.11% 10.40% 9.66% 8.81% 8.03% 7.34% 6.72%Accrued other postretirement be 10.22% 9.01% 9.35% 8.97% 7.90% 7.09% 6.64% 6.17% 5.63% 5.13% 4.69% 4.29%Total other noncurrent liabilities 11.15% 10.54% 9.84% 10.38% 10.38% 10.38% 10.38% 10.38% 10.38% 10.38% 10.38% 10.38%Deferred income taxes 1.75% 1.38% 2.31% 2.33% 2.16% 2.05% 2.01% 1.97% 1.89% 1.81% 1.74% 1.68%Total liabilities 96.47% 94.56% 99.39% 95.26% 93.48% 90.77% 88.96% 87.04% 85.11% 82.73% 80.83% 79.26%Preferred stock 0.24% 0.23% 0.24% 0.25% 0.23% 0.21% 0.21% 0.20% 0.19% 0.18% 0.18% 0.17%Mandatory convertible preferred 0.00% 0.01% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common stock 37.72% 44.29% 50.63% 51.16% 47.44% 44.89% 44.24% 43.27% 41.57% 39.68% 37.98% 36.39%Retained earnings 40.26% 39.23% 39.20% 43.08% 43.71% 45.08% 48.08% 50.64% 52.34% 53.93% 55.67% 57.40%Treasury stock, at cost ‐16.33% ‐12.72% ‐12.54% ‐12.59% ‐11.61% ‐10.93% ‐10.71% ‐10.42% ‐9.95% ‐9.49% ‐9.09% ‐8.71%Accumulated other comprehens ‐15.89% ‐19.56% ‐24.10% ‐14.90% ‐13.74% ‐12.92% ‐12.67% ‐12.32% ‐11.77% ‐11.23% ‐10.75% ‐10.30%Total Alcoa shareholders' equity 45.99% 51.48% 53.46% 67.01% 66.04% 66.34% 69.15% 71.38% 72.38% 73.07% 73.99% 74.96%Noncontrolling interests 12.72% 10.41% 9.25% 9.30% 8.57% 8.06% 7.90% 7.69% 7.35% 7.01% 6.71% 6.43%Total equity 58.71% 61.88% 62.71% 76.30% 74.61% 74.40% 77.06% 79.07% 79.73% 80.07% 80.69% 81.38%

Alcoa Inc.

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

Key Inputs:

CV Growth 4.32%

CV ROIC 8.29%

WACC 7.39%



DCF Model 1 2 3 4 5 6 7 8 9

FCF 202 4 220 922 1,308 999 746 903 1,038

CV 33,779

NOPLAT CV Growth

PV of FCF 188 4 178 693 916 651 453 510 19,092

Value of Operating Assets 22,685

Add: Excess Cash 1,468

Add: Other Non‐current Assets 4,006

Add: Investments 1,685

Add: Noncontrolling Interest 2,085

Subtract: ESOP ‐584

Subtract: PV Operating Leases ‐751

Subtract: Short Term Borrowings ‐38

Subtract: Long‐Term Debt ‐9,065

Subtract: Accrued Pension Benefits ‐3,298

Subtract: Postretirement Benefits ‐2,106

Subtract: Other Non‐Current Liabilities ‐2,217

Value of Equity 13,870

Total Shares Outstanding 436720

Est. Intrinsic Stock Price as of 12/31/15 31.76$


Fiscal Years Ending 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EP Model 1 2 3 4 5 6 7 8 9

Economic Profit 283 306 280 199 183 225 245 236 235

CV of EP 7,650

PV of EP 264 265 226 150 128 147 149 134 4,324

Beginning Invested Capital 16,899

PV of EP 5,786 22,685

Add: Excess Cash 1,468

Add: Other Non‐current Assets 4,006

Add: Investments 1,685

Add: Noncontrolling Interest 2,085

Subtract: ESOP ‐584

Subtract: PV Operating Leases ‐751

Subtract: Short Term Borrowings ‐38

Subtract: Long‐Term Debt ‐9,065

Subtract: Accrued Pension Benefits ‐3,298

Subtract: Postretirement Benefits ‐2,106

Subtract: Other Non‐Current Liabilities ‐2,217

Value of Equity 13,870

Total Shares Outstanding 436720



Today 10/31/2016

Next FYE 12/31/2016

Last FYE 12/31/2015

Days in FY 366

Days to FYE 305

Elapsed Fraction 0.833

RE* 10.14%

Alcoa Inc.

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


1 2 3 4 5 6 7 8 8

EPS $2.28 $2.60 $2.74 $2.76 $2.82 $2.99 $3.17 $3.33 $3.51

Key Assumptions CV growth 5.16%

CV ROE 8.29%


Future Cash Flows P/E Multiple (CV Year) 6.02

EPS (CV Year) $3.51

Future Stock Price 21.11$

Dividends Per Share 0.378 0.3969 0.416745 0.437582 0.459461 0.482434 0.506556 0.531884 0.558478

Discounted Cash Flows 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 8.9

Intrinsic Value 10.77$

Partial Year Adjusted 11.68$

Alcoa Inc.

Value Driver Estimation


Sales 23,032 23,906 22,534 22,431 24,323 25,857 26,384 27,124 28,385 29,756 31,082 32,440

Cost of goods sold 19,286 19,137 18,069 17,720 19,215 20,427 20,843 21,428 22,424 23,507 24,555 25,628

Selling, general administrative & other expenses 1,008 995 979 1,009 1,095 1,164 1,187 1,221 1,277 1,339 1,399 1,460

Research & development expenses 192 218 238 192 208 221 225 232 242 254 265 277

Provision for depreciation, depletion & amortization 1,421 1,371 1,280 1,286 1,395 1,483 1,513 1,555 1,628 1,706 1,782 1,860

Interest on Leases 43.0 34.2 32.1 32.4 34.1 37.0 39.4 40.2 41.3 43.2 45.3 47.3

EBITA 1,082 2,151 1,936 2,191 2,377 2,526 2,576 2,648 2,772 2,906 3,036 3,168

Marginal Tax Rate 35% 32% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%

Income Tax Provision 428 320 445 536 615 651 658 676 719 763 804 845

Tax Shield on Interest Expense 157 153 176 139 125 142 153 160 160 163 168 173

Tax Shield on Amortized goodwill 601 0 9 0 0 0 0 0 0 0 0 0

Tax shield on other non‐operating expenses (income) ‐9 15 1 ‐27 ‐28 ‐28 ‐28 ‐28 ‐28 ‐28 ‐28 ‐28

Total Adjusted Taxes 1,177 488 631 648 713 765 783 808 851 898 944 990

Change in deferred taxes 549 357 277 ‐11 ‐11 ‐11 ‐11 ‐11 ‐11 ‐11 ‐11 ‐11

NOPLAT 454 2,020 1,582 1,533 1,653 1,750 1,782 1,829 1,910 1,997 2,081 2,167

Normal Cash 461 478 451 449 486 517 528 542 568 595 622 649

A/R, net 1,221 1,395 1,340 1,346 1,459 1,551 1,583 1,627 1,703 1,785 1,865 1,946

Other Receivables 597 733 522 473 513 546 557 572 599 628 656 684

Inventories 2,705 3,082 3,442 2,759 2,992 3,181 3,245 3,337 3,492 3,660 3,823 3,991

Prepaid expenses & other current assets 1,009 1,182 730 945 1,025 1,089 1,111 1,143 1,196 1,253 1,309 1,367

Operating current assets 5,993 6,870 6,485 5,972 6,476 6,884 7,024 7,221 7,557 7,922 8,275 8,637

Accounts Payable 2,960 3,152 2,889 2,434 2,640 2,806 2,863 2,944 3,081 3,230 3,373 3,521

Accrued Compensation and Retirement 1,013 937 850 870 937 995 1,020 1,054 1,111 1,177 1,245 1,318

Income Taxes Payable 376 348 239 401 435 463 472 485 508 532 556 580

Other Current Liabilities 1,044 1,021 1,174 1,445 1,462 1,279 877 999 1,187 1,127 1,095 1,137

Operating Current Liabilities 5,393 5,458 5,152 5,151 5,474 5,544 5,232 5,483 5,887 6,066 6,270 6,557

Operating Working Capital 600 1,412 1,333 821 1,001 1,340 1,792 1,738 1,670 1,856 2,006 2,080

Property, Plant, Equipment (net) 17,639 16,426 14,815 16,617 18,019 19,156 19,546 20,094 21,028 22,044 23,026 24,032

Present Value of Operating Leases 794 744 751 791 858 912 931 957 1,001 1,050 1,097 1,144Total Invested Capital 19,032 18,583 16,899 18,229 19,879 21,408 22,268 22,789 23,700 24,950 26,128 27,257

ROIC [NOPLAT/Total Inv Capital] 2.18% 10.61% 8.51% 9.07% 9.07% 8.80% 8.32% 8.21% 8.38% 8.43% 8.34% 8.29%

EP [Total Inv Capital*(ROIC ‐ WACC)] ‐1,086 613 208 283 306 280 199 183 225 245 236 235

FCF [NOPLAT ‐ (Ending Inv Capital ‐ Beg Inv Capital)] 2,254 2,469 3,265 202 4 220 922 1,308 999 746 903 1,038

Alcoa Inc.

Weighted Average Cost of Capital (WACC) Estimation

Risk‐Free Rate 2.86%

Risk Premium 5.00%

Beta 1.716


Cost of Debt 4.315%

Marginal Tax Rate 35%

After‐Tax Cost of Debt 2.80%

Cost of Preferred Stock

Class A Shares Outstanding 546,024

Preferred Dividends ‐ Class A 3.75

Class A Share Price 90.4

Cost of Preferred ‐ Class A 4.15%

Class B Shares Outstanding 2500000

Preferred Dividends ‐ Class B 2.687

Class B Share Price 27.71

Cost of Preferred ‐ Class B 9.70%

Total Common Shares Outstanding 438459934

Common Share Price $28.72

Total Equity 12592569304

Book Value Debt 810408

Market Value Debt 9146045606

Total Debt 9146856014

Total Preferred ‐ Class A 49360569.6

Total Preferred ‐ Class B 69275000

Total Enterprise Value 21858060888

Weight of Equity 57.6%

Weight of Debt 41.8%

Weight of Preferred ‐ Class A 0.2%

Weight of Preferred ‐ Class B 0.3%

WACC 7.39%

CAPM

WACC

Weights

Alcoa Inc.Key Management Ratios


Liquidity RatiosCurrent Ratio (CA/CL) 114.15% 149.23% 152.62% 153.54% 142.14% 144.72% 159.71% 165.40% 165.73% 169.33% 174.38% 178.84%Quick Ratio (C,MS,AR/CL) 43.54% 59.05% 62.54% 73.54% 70.22% 72.20% 83.31% 88.41% 89.85% 91.82% 95.69% 99.83%

Activity or Asset‐Management RatiosReceivables Turnover (Sales/Recievables) 18.86 17.14 16.82 16.67 16.67 16.67 16.67 16.67 16.67 16.67 16.67 16.67Days' Recievables (365/Recievables Turnover) 19.35 21.30 21.70 21.90 21.90 21.90 21.90 21.90 21.90 21.90 21.90 21.90Inventory Turnover (COGS/Inventory) 7.13 6.21 5.25 6.42 6.42 6.42 6.42 6.42 6.42 6.42 6.42 6.42Days' Inventory (Inventory Turnover/365) 51.2 58.8 69.5 56.8 56.8 56.8 56.8 56.8 56.8 56.8 56.8 56.8Total Assets Turnover (Sales/Total Assets) 0.64 0.64 0.62 0.58 0.59 0.61 0.60 0.60 0.61 0.61 0.62 0.62Financial Leverage RatiosDebt‐to‐Equity Ratio (Total Debt/Total Equity) 61.10% 59.47% 64.15% 47.64% 50.85% 51.72% 51.23% 48.61% 46.95% 45.92% 44.97% 43.94%Equity Multiplier (Total Assets/Total Equity) 2.64 2.53 2.58 2.25 2.25 2.22 2.15 2.10 2.07 2.03 2.00 1.97Degree of Financial Leverage (EBIT/Pre‐Tax Income) 0.75 1.95 3.01 1.26 1.20 1.22 1.23 1.23 1.22 1.21 1.21 1.20Debt to EBITA (Total Debt/EBITA) 7.64 4.09 4.68 3.72 3.88 3.94 4.04 3.94 3.83 3.77 3.72 3.66Profitability RatiosReturn on Asssets (Net Income/Total Assets) ‐6.39% 0.72% ‐0.88% 2.59% 2.79% 2.83% 2.79% 2.79% 2.85% 2.93% 2.97% 3.01%Gross Profit Margin (Sales‐COGS/Sales) 16.26% 19.95% 19.81% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00%Operating Margin (Operating Income/Net Sales) 5.83% 9.86% 9.78% 11.11% 11.09% 11.07% 11.06% 11.06% 11.04% 11.03% 11.02% 11.01%After‐Tax Profit Margin (Net Income/Sales) ‐9.92% 1.12% ‐1.43% 4.44% 4.69% 4.68% 4.63% 4.63% 4.71% 4.76% 4.80% 4.84%Payout Policy RatiosDividend Payout Ratio (Dividends Paid/EPS) ‐16.82% 171.43% ‐116.13% 16.61% 15.27% 15.20% 15.86% 16.28% 16.13% 16.00% 15.95% 15.93%

Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases #REF! Leases

2016 243000 2015 205000 2014 198000

2017 168000 2016 172000 2015 165000

2018 130000 2017 131000 2016 135000

2019 100000 2018 101000 2017 103000

2020 74000 2019 79000 2018 80000

Thereafter 138000 Thereafter 165000 Thereafter 244000

Total Minimum Payments 853000 Total Minimum Payments 853000 Total Minimum Payments 925000

Less: Interest 101592 Less: Interest 108576 Less: Interest 131418

PV of Minimum Payments 751408 PV of Minimum Payments 744424 PV of Minimum Payments 793582

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 4.32% Pre‐Tax Cost of Debt 4.32% Pre‐Tax Cost of Debt 4.32%

Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 3.1

Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 243000 232948.3 1 205000 196520.2 1 198000 189809.7

2 168000 154388.8 2 172000 158064.7 2 165000 151631.8

3 130000 114525.7 3 131000 115406.7 3 135000 118930.6

4 100000 84452.6 4 101000 85297.1 4 103000 86986.2

5 74000 59909.8 5 79000 63957.8 5 80000 64767.4

6 & beyond 74000 105182.8 6 & beyond 79000 125177.3 6 & beyond 80000 181456.2

PV of Minimum Payments 751408.0 PV of Minimum Payments 744423.8 PV of Minimum Payments 793581.9

Alcoa Inc.Relative Valuation Models

Ticker Company Price # of Shares Market Cap 2016E 2017E 2016E 2017E P/S 16 P/S 17

ACH Aluminum Corp of China LTD $2.90 3,944,000,000 11,437,600,000 $17,184,920,000 $17,732,000,000 4.36 4.50 0.67 0.65

HNDL Hindalco Industries $2.34 2,065,200,000 4,832,568,000 $15,613,180,000 $16,294,830,000 7.56 7.89 0.31 0.30

NHYDY Norsk Hydro $4.57 2,069,000,000 9,455,330,000 $9,845,910,000 $10,219,380,000 4.76 4.94 0.96 0.93

486 UC Rusal $0.36 15,193,000,000 5,469,480,000 $7,742,580,000 $7,842,550,000 0.51 0.52 0.71 0.70CSTM Constellium A $5.15 105,500,000 543,325,000 $5,252,000,000 $5,601,600,000 49.78 53.10 0.10 0.10

Median 0.67 0.65

AA Alcoa Inc. $28.72 437,624,652 12,568,580,013 $22,430,946,300 $24,323,045,894 51.3 55.6 0.56 0.52

Implied Value:

P/S (EPS16) 34.11$

P/S (EPS17) 35.85$

Sales Sales Per Share

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

Number of Options Outstanding (shares): 33,000

Average Time to Maturity (years): 6.08

Expected Annual Number of Options Exercised: 5,428

Current Average Strike Price: 11.91$

Cost of Equity: 11.44%

Current Stock Price: $28.72

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Increase in Shares Outstanding: 5,428 5,428 5,428 5,428 5,428 5,428 434

Average Strike Price: 11.91$ 11.91$ 11.91$ 11.91$ 11.91$ 11.91$ 11.91$ 11.91$ 11.91$

Increase in Common Stock Account: 64,643 64,643 64,643 64,643 64,643 64,643 5,171 ‐ ‐

Change in Treasury Stock 0 0 0 0 0 0 0 0 0

Expected Price of Repurchased Shares: 28.72$ 32.00$ 35.67$ 39.75$ 44.29$ 49.36$ 55.00$ 61.29$ 68.30$

Number of Shares Repurchased: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Shares Outstanding (beginning of the year) 436,720 442,148 447,575 453,003 458,431 463,858 469,286 469,720 469,720

Plus: Shares Issued Through ESOP 5,428 5,428 5,428 5,428 5,428 5,428 434 0 0

Less: Shares Repurchased in Treasury ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Shares Outstanding (end of the year) 442,148 447,575 453,003 458,431 463,858 469,286 469,720 469,720 469,720

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AA

Current Stock Price $28.72

Risk Free Rate 2.86%

Current Dividend Yield 1.30%

Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 33,000 11.91 6.08 17.69$ 583,833$

Range 2

Range 3

Range 4 ‐$

Range 5 ‐$

Range 6 ‐$

Range 7 ‐$

Range 8 ‐$

Range 9 ‐$

Range 10 ‐$

Range 11 ‐$

Range 12 ‐$

Range 13 ‐$

Range 14

Total 33,000 11.91$ 6.08 19.73$ 583,833$

final report

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