International investor Wilbur Ross said Alcoa is doing a "very good job" of navigating plunging commodity prices and overall economic volatility.
"Alcoa is adjusting to [China] because they made this big move into titanium and other different metals," the chairman and CEO of WL Ross & Co. told
CNBC. "That's why they're doing the split-up."
His comments come as the aluminum producer struggles to reinvent itself.
Alcoa, which reports fourth-quarter results later on Monday, said in September it would break itself in two, separating its faster-growing aircraft and car parts business from its traditional smelting operations as shareholders seek higher returns amid a slump in metal prices.
The company said last week it would close its 269,000 tonne-per-year Warrick smelter in Evansville, Indiana, the largest operating smelter in the United States. The closure will leave Alcoa with just one active U.S. smelter, the 130,000 tonne-per-year Massena West plant in New York state.
While encouraged by Alcoa's execution, Ross said he's not a buyer of the stock yet, "because they have a couple of bad quarters to get through."
"Chances are there's more value in the newer things that they've been doing than there was in the old stuff because China is exporting an awful lot of aluminum," Ross said. "And it's a real problem for everybody. The price is down 25 percent in a very short time period. But commodities don't go to zero. Eventually they stabilize at something above the margin cost of production."
Shares of Alcoa, a former Dow component, have lost nearly half their value in the past 12 months.
With aluminum prices near six-and-a-half-year lows and China’s woes slamming market sentiment globally, Alcoa’s drop shouldn’t come as a surprise. There is reason to believe the selloff might be overdone, though, The
Wall Street Journal explained.
"Alcoa has fallen victim as a commodities play. Anything tied to tumbling energy and materials prices has been hit hard amid a broad market selloff spurred by Chinese growth concerns. But Alcoa’s legacy smelting and refining businesses, which are being separated from downstream operations that supply components to the auto and aerospace industries, make up a much smaller part of Alcoa’s value today," the Journal reported.
With aluminum stuck near a six-year low, the New York-based company is doing everything it can to stop domestic and other unprofitable production,
Bloomberg reported.
While oversupply is expected to keep prices in a bear market, demand for the metal sheets and parts Alcoa makes for airplanes, cars and other industries is climbing, and 2015 is expected to be its most-profitable year since 2011.
Meanwhile, Chief Executive Officer Klaus Kleinfeld has spent more than $4 billion since 2014 on acquisitions to bolster the company’s aerospace offerings. Last year will be Alcoa’s final period as an integrated producer, and earnings were helped by cutting back on smelting and investing in capacity to make higher-margin products.
“They’re doing a better job,” Dave Lipschitz, a New York-based analyst at CLSA, who recommends selling the stock, said in an interview. “Aluminum prices are a lot lower, and they’re still earning money.”
(Newsmax wire services contributed to this report).
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