Alcoa Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (AA-NYSE)

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1 January 14, 2015 Alcoa Inc. (AA-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 07/19/2010 Current Price (01/13/15) $15.80 Target Price $ Week High $ Week Low $10.10 One-Year Return (%) Beta 1.76 Average Daily Volume (sh) 15,196,565 Shares Outstanding (mil) 1,180 Market Capitalization ($mil) $18,644 Short Interest Ratio (days) 2.13 Institutional Ownership (%) 68 Insider Ownership (%) 1 Annual Cash Dividend $0.12 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.6 Earnings Per Share (%) -9.2 Dividend (%) 0.0 P/E using TTM EPS 17.2 P/E using 2015 Estimate 13.9 P/E using 2016 Estimate 12.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY We are retaining our Neutral recommendation on Alcoa. The company ended 2014 on a strong note with both revenues and earnings topping Zacks Consensus Estimates in the fourth quarter. It swung to a profit on strength across the aerospace and automotive markets, higher metals pricing and productivity gains. The company provided a strong forecast for the aerospace market in Alcoa is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions. Healthy demand across the aerospace and automotive markets is expected to drive results moving ahead. However, weakness continues in the European building & construction and commercial transportation markets. Moreover, Alcoa remains exposed to a volatile pricing environment. Risk Level * Average, Type of Stock Large-Value Industry Mining -Non Fer Zacks Industry Rank * 171 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,833 A 5,849 A 5,765 A 5,585 A 23,032 A ,454 A 5,836 A 6,239 A 6,377 A 23,906 A ,184 E 6,343 E 6,409 E 6,504 E 25,440 E ,916 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.11 A $0.07 A $0.11 A $0.04 A $0.33 A 2014 $0.09 A $0.18 A $0.31 A $0.33 A $0.92 A 2015 $0.28 E $0.30 E $0.30 E $0.26 E $1.14 E 2016 $1.27 E *Note: EPS in 2014 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Alcoa Inc. (AA), a Pennsylvania-based corporation, is among the world leader in the in the production and management of primary aluminum, fabricated aluminum, and alumina as well as the world s largest miner of bauxite and refiner of alumina. It involves mining, refining, smelting, fabricating and recycling of aluminum. Alcoa is also engaged in investments and operating activities in, among others, Australia, Brazil, China, Guinea, Iceland, Russia, and Saudi Arabia, all of which present opportunities for substantial growth. Alcoa s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. Alumina - This segment represents a portion of Alcoa s upstream operations and consists of the company s worldwide refinery system, including the mining of bauxite, which is then refined into alumina. Alumina is mainly sold directly to internal and external smelter customers worldwide or is sold to customers who process it into industrial chemical products. A portion of this segment s third-party sales are completed through the use of agents, alumina traders, and distributors. Primary Metals - This segment represents a portion of Alcoa s upstream operations and consists of the company s worldwide smelter system. Primary Metals receives alumina, mostly from the Alumina segment, and produces primary aluminum used by Alcoa s fabricating businesses, as well as sold to external customers, aluminum traders, and commodity markets. Global Rolled Products - The principal business of the segment is the production and sale of aluminum plate, sheet and foil. This segment includes rigid container sheet, which is sold directly to customers in the packaging and consumer market. This segment also includes sheet and plate used in the aerospace, automotive, commercial transportation, and building and construction markets. This segment represents Alcoa s midstream operations. A small portion of this segment s operations relate to foil produced at one plant in Brazil. Engineered Products and Solutions - This segment represents Alcoa s downstream operations and includes titanium, aluminum, and super alloy investment castings; forgings and fasteners; aluminum wheels; integrated aluminum structural systems; and architectural extrusions used in the aerospace, automotive, building and construction, commercial transportation, and power generation markets. These products are sold directly to customers and through distributors. Additionally, hard alloy extrusions products, which are also sold directly to customers and through distributors, serve the aerospace, automotive, commercial transportation, and industrial products markets. Firth Rixson Acquisition Alcoa, in June 2014, agreed to buy U.K.-based leading jet engine components maker Firth Rixson from private equity firm Oak Hill Capital Partners in a cash and stock deal worth $2.85 billion. The company wrapped up the acquisition in November 2014 following the receipt of all the necessary regulatory clearances and arrangement of financing for the deal. Under the deal terms, Alcoa bought Firth Rixson for $2.35 billion in cash and $500 million of its stock and an additional $150 million for specific earningsrelated milestones. The buyout has been backed by a fully committed bridge facility from Morgan Stanley (MS). Equity Research AA Page 2

3 Firth Rixson is currently the global number one in seamless rolled jet engine rings that are engineered from nickel-based superalloys and titanium, and is a leading supplier of jet engine forgings. Its sales are expected rise 12% annually through 2019, a rate more than double the global aerospace market. Its revenues have been forecast to increase 60% over the next 3 years to $1.6 billion from $1 billion in The acquisition of Firth Rixson it a strategic fit for Alcoa as it complements the latter s goal to strengthen its global aerospace portfolio. REASONS TO BUY Alcoa has established itself already as a key domestic supplier in some of the markets like packaging, aero and commercial and transportation in Russia. Alcoa formed a joint venture with the Saudi Arabian Mining Company, Ma aden, to build the largest and lowest-cost integrated aluminum facility in the highly populated Middle East region, where infrastructures are developing to keep pace with growing consumer demand. The project involves low energy costs in an environment which will have new infrastructure. The smelter came online last year and ramp up is complete. The rolling mill has commenced production and the refinery came online and produced first alumina in fourth-quarter Moreover, the company has signed multi-year agreements with Airbus for virtually all Airbus commercial programs, including models like A320, A350 and A380. The deal is valued at roughly $1.4 billion. As per the deal, Alcoa will provide Airbus with aluminum sheet and plate, and aluminum lithium alloys for manufacturing aircraft. A number of Alcoa s facilities will be utilized in executing the deal. We expect such expansions to drive Alcoa s top line. Alcoa signed another $110 million deal with Airbus, under which, it will supply titanium and aluminum aerospace forgings to the aircraft maker. Alcoa is aggressively slashing cost. The company has been actively engaged in curtailment of smelting capacity and has also permanently closed smelters as part of its initiative to reduce costs. Alcoa curtailed 655,000 metric tons of smelting capacity during The company, in 2014, reduced 147,000 metric tons of smelting capacity in Brazil and also closed a 190,000-metric ton smelter in Australia. Since 2007, the company has curtailed, closed or sold 1.3 million metric tons, or 31%, of its highest cost global smelting capacity. In addition to the closures and curtailments, Alcoa plans to aggressively accelerate actions to reduce the cost of raw materials used by its Primary Products business and will adjust capacity across its global refining system to reflect internal demand as well as prevailing market conditions. The company is pursuing strategies to move down its cost curves in its upstream businesses, and record profitability in its midstream and downstream businesses. In conjunction with the revenue targets, management is committed to improving margins that will exceed historical levels in the midstream and downstream operations. The company aims to achieve these goals by optimizing its portfolio and restructuring its high-cost assets. The company achieved $1.2 billion in productivity gains in 2014 has set a productivity improvement target of $900 million for Alcoa is seeing strength in the aerospace and auto markets. The company is seeing improving airline fundamentals and expects the aerospace market to grow 9%-10% in 2015, factoring in strong demand for both large commercial aircraft and regional jets and sustained growth in the business jet market. Growth will be backed by strength in the commercial segment on higher air travel demand, new aircraft orders and strong existing order backlog. Moreover, the move to buy Firth Rixson represents a significant milestone in Alcoa s portfolio transformation strategy. It reinforces the company s aerospace business and strongly places it to capture additional growth in this growing market through a broad spectrum of high-growth, value-add jet engine components. Alcoa, through this acquisition, will penetrate into a highly specialized segment of jet engine forgings that need isothermal forging technology. The acquisition is expected to expand Alcoa s annual aerospace revenues by 20% to $4.8 billion from $4 billion in It will also contribute Equity Research AA Page 3

4 $350 million EBITDA by Moreover, Alcoa is expected to realize significant cost synergy from the transaction with cost savings reaching over $100 million by the fifth year. The $1.1 billion agreement to supply key parts (including forgings) for Pratt & Whitney s engines also underscores Alcoa s continued efforts to profitably grow its aerospace business. Alcoa also landed a long-term deal with Boeing in Sep 2014 to supply aluminum sheet and plate products. The contract, which is worth more than $1 billion, is the largest ever between the two companies. Alcoa recently made another major push into the aerospace market as it has agreed to buy Germany-based Tital a leading provider of titanium and aluminum structural castings for aircraft engines and airframes. The acquisition is expected reinforce Alcoa s position to leverage strong growth in the commercial aerospace sector and capture rising demand for advanced jet engine components made of titanium. The auto industry is also showing strength. As per automotive original equipment manufacturers (OEMs), the use of aluminum in cars is expected to double by 2025 as automakers seek more fuel efficiency by reducing vehicle mass. Currently, aluminum represents the second largest-volume component material in automotive vehicles. Many OEMs are expanding aluminum use from heat exchangers, wheels, drive shafts, engine blocks, hoods and deck lids to develop aluminum intensive vehicles (AIVs) by converting the body in white, or body structure, to aluminum. Alcoa expects automotive demand growth of 5%-8% in China in 2015 on the back of growth in middle-class driving. In commercial transportation, the recently launched Ultra ONE the world s lightest heavy-duty truck wheel represents a major opportunity. Ultra ONE is a new 40-pound wheel and being 47% lighter than steel wheels of the same size it will help trucks carry more load and also improve fuel efficiency. REASONS TO SELL The company is still witnessing softness across building and construction and commercial transportation markets. It expects weakness in non-residential building and construction market to persist in Europe and expects a 2%-3% decline this year. Alcoa also expects commercial transportation market to decline 5%-10% in Europe in 2015, partly due to regulatory changes. Orders remains down in this market in Western Europe. The company also expects a decline in the packaging market in North America. The aluminum industry is highly cyclical, impacted by worldwide supply and demand forces along with other influences. Alcoa is subject to cyclical fluctuations in London Metal Exchange (LME) prices, general economic conditions and aluminum end-use markets. Alcoa remain exposed to higher energy and raw material costs. Higher-than-expected input costs or unplanned outages could negatively impact its margins. Inability to successfully execute its restructuring plans and cost-cutting measures could hinder its share price performance. While improved pricing aided Alcoa s results in the most recent quarter, it is still faced with a volatile pricing environment. LME aluminum prices still remain under pressure given the oversupply of the metal in the market (evidenced by large aluminum inventories in LME warehouses). Alcoa is expected to continue face pricing pressure in Europe and China. The company benefited from higher realized aluminum prices in the most recent quarter which may not sustain moving ahead. Equity Research AA Page 4

5 RECENT NEWS Alcoa's Q4 Earnings Top on Aerospace, Auto Strength Jan 12, 2015 Alcoa surpassed earnings estimates in the fourth quarter of 2014 on strong aluminum demand from aerospace and automotive markets and higher metals pricing, backed by its ongoing efforts to reposition its portfolio. The company raked in a profit, as reported, of $159 million or $0.11 per share in the fourth quarter as against a net loss of $2.3 billion or $2.19 per share in the year-ago quarter and compared with an income of $149 million or $0.12 per share in the third quarter. Alcoa recorded $200 million in restructuring charges in the upstream and midstream businesses. Restructuring actions were mostly related to cost reduction in the commodity business. Excluding one-time special items, earnings came in at $432 million or $0.33 per share in the reported quarter, much ahead of the year-ago earnings of $40 million or $0.04 per share. Earnings per share also surpassed the Zacks Consensus Estimate of $0.26. For 2014, Alcoa posted net income of $268 million or $0.21 per share, as opposed to a net loss of $2.3 billion or $2.14 per share in Excluding the impact of special items, net income came in at $1.1 billion, or $0.92 per share, up from net income of $357 million, or $0.33 per share in Earnings topped the Zacks Consensus Estimate of $0.86. Revenues rose 14.2% to $6,377 million in the fourth quarter from $5,585 million in the year-ago quarter and also increased 2.2% from the previous quarter. Revenues exceeded the Zacks Consensus Estimate of $6,023 million. The increase can be mainly be attributed to higher sales in Alcoa s mid and downstream businesses, increased metal prices and energy sales. For 2014, revenues increased 4% year over year to $23.9 billion, also ahead of the Zacks Consensus Estimate of $23.5 billion. Alcoa expects global aluminum demand to rise 7% in Segment Review Alumina - Shipments in the reported quarter were 2.9 million metric tons on production of 4.2 million metric tons. After Tax Operating Income (ATOI) was $178 million, up from $70 million in the year-ago quarter as well as $62 million in the sequentially preceding quarter. The sequential rise was mainly due to higher pricing favorable currency exchange rates and energy costs and higher productivity. However, this increase was partly offset by higher pre-operational costs at the Saudi Arabia refinery and maintenance costs. Primary Metals - Shipments in the quarter were 0.6 million metric tons, down 11.2% from the year-ago quarter. Production in the quarter was 0.7 million metric tons, down 15.6% from the prior-year quarter. ATOI was $267 million compared with negative $35 million in the year-ago quarter and $245 million in the prior quarter. The sequential improvement in ATOI was led by higher realized prices, the absence of charges related to earlier announced smelter closures in Italy and Australia, higher productivity, ramp up of the Saudi Arabia smelter and favorable foreign exchange translation. Equity Research AA Page 5

6 Global Rolled Products - Shipments in the quarter were roughly 0.5 million metric tons, up 7.3% year over year. Third-party revenues were $1.9 billion, up 14.8% year over year. The segment posted ATOI of $71 million, which increased 238% year over year but decreased 31.1% sequentially. The year-over-year jump was led by strong productivity, higher metal prices, and increased automotive and aerospace volumes in North America. The segment will continue to boost production in the first quarter of 2015 to cater to the growing demand for aluminum intensive vehicles. Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 10.7% year over year. The segment posted ATOI of $165 million, down 1.8% year over year and 21.1% sequentially. The sequential results were driven by favorable productivity and higher volumes. Financial Position Alcoa s cash and cash equivalents stood at $1,877 million as of Dec 31, 2014, a 30.6% increase from $1,437 million as of Dec 31, Alcoa had a debt-to-capital ratio of 37.4% at the end of 2014 compared with 34.8% a year ago. Portfolio Transformation In the downstream business, Alcoa has wrapped up the acquisition of Firth Rixson. With this buyout, Alcoa s sales are expected to increase by $1.6 billion, adding another $350 million to earnings before interest, tax, depreciation and amortization (EBITDA) by 2016 and $2 billion by Alcoa has taken another major step to expand in the fast-growing aerospace market as it has agreed to buy Germany-based Tital. The move is in sync with Alcoa s goal to profitably grow its aerospace franchise and is part of the company s portfolio transformation strategy as it plans to gradually shift its focus to the lucrative aerospace and automotive markets. Tital s titanium revenues are expected to increase 70% and the transaction is expected to close in the first quarter of Alcoa also announced that it is doubling its jet engine coating technology capacity at its Whitehall, MI, facility to further reinforce its global aerospace portfolio to address increasing demand for hotter-running, more fuel-efficient jet engines. In the midstream business, Alcoa has launched the Micromill to make the most advanced aluminum sheet on the market. Micromill s breakthrough casting technology will allow Alcoa to capture rising demand from the automotive industry. Automotive parts made with Micromill material will be twice as formable and 30% lighter than parts made from high strength steel. During the quarter, Alcoa finalized the sale of three European rolling mills, two in Spain and one in France, to a subsidiary of Atlas Holdings LLC. The company also completed the closure of the Point Henry and Yennora can sheet rolling mills in Australia. All these actions are taken to better focus on higher growth products and markets. Strategic Actions Alcoa s strategic repositioning of its value and commodities businesses is working well for the company. While making capital investments, it also remains on track to move down the cost curve and curtail capacities in its upstream business, which will improve the competitiveness of the company s Primary Products business. Equity Research AA Page 6

7 Alcoa has completed the sale of two upstream assets. Alcoa World Alumina and Chemicals divested its 55% ownership stake in the Jamalco bauxite mining and alumina refining joint venture to Noble Group Ltd for $140 million. Alcoa also disposed its 50.33% stake in the Mt. Holly aluminum smelter to Century Aluminum Company for $67.5 million. Outlook Alcoa expects global aerospace sales to increase 9% to 10% year over year in 2015 on the back of strong demand for large commercial aircraft, regional jets and jet engines. For automotive, the company forecasts steady growth to continue this year. Alcoa anticipates global automotive production in the range of 2% to 4%, supported by replacement demand, low lending rates in North America, and the growth of both the middle class and clean air regulations in China. Alcoa expects stable global commercial transportation production of negative 1% to positive 3% for The company expects the trucking market in North America to remain positive in 2015 with an increase of 3% to 7% in production on strong orders and freight growth. In the packaging market, Alcoa envisions worldwide sales growth of 2% to 3% in Alcoa sees the building and construction market to continue to improve from 2014 levels with worldwide sales growth of 5% to 7% this year. While the North American market is expected to sustain its gradual recovery in 2015, the European market is likely to decline. Alcoa expects growth rate in the range of 1% to 3% in 2015 for the industrial gas turbine market, a turnaround from a decline in Improvement is expected in the airfoil market as original equipment manufacturers develop new, advanced turbines and upgrade existing turbines. Alcoa's Q3 Earnings Trump on Strong Aluminum Pricing Oct 8, 2014 Alcoa topped earnings estimates in the third quarter of 2014 on record results from its downstream business, aided by higher aluminum pricing and strong productivity. The company's legacy primary metals business also delivered strong results, helped by lower raw material costs and higher pricing. Alcoa gained from healthy demand for aluminum across aerospace and auto markets and its ongoing efforts to reposition its portfolio, including closure of high-cost smelters. The company raked in a profit of $149 million or $0.12 per share in the third quarter compared with net income of $24 million or $0.02 per share in the year-ago quarter and an income of $138 million or $0.12 per share in the second quarter. Alcoa recorded $221 million in restructuring charges and other special items in the quarter. Restructuring actions were mostly related to reduction of costs in the commodity business. Excluding one-time special items, earnings came in at $370 million or $0.31 per share in the reported quarter, ahead of the year-ago earnings of $120 million or $0.11 per share. Earnings per share also surpassed the Zacks Consensus Estimate of $0.21. Revenues rose 8.2% to $6,239 million in the third quarter from $5,765 million in the year-ago quarter and also increased 7% from the previous quarter. It exceeded the Zacks Consensus Estimate of $5,781 million. The increase can be mainly attributed to organic growth, favorable pricing and higher energy sales. Alcoa reaffirmed its global aluminum demand growth expectations of 7% for Equity Research AA Page 7

8 Segment Review Alumina - Shipments in the reported quarter were 2.7 million metric tons on production of 4.2 million metric tons. ATOI was $62 million, down from $67 million in the year-ago quarter but up from $38 million in the sequentially preceding quarter. The sequential rise in ATOI was mainly due to higher volume, favorable foreign exchange rates, increased pricing on London Metal Exchange-based contracts and increased productivity. However, this increase was partly offset by lower Alumina Price Index (API) based pricing and higher energy costs in Australia. Primary Metals - Shipments in the quarter were 0.6 million metric tons, down 7.4% from the year-ago quarter. Production in the quarter was 0.8 million metric tons, down 15.3% from the prior-year quarter. ATOI was $245 million compared with $8 million in the year-ago quarter and $97 million in the prior quarter. The sequential improvement in ATOI was led by realized prices, lower alumina costs, increased productivity, ramp up of the Saudi Arabia smelter, favorable foreign exchange translation and increased power sales. Global Rolled Products - Shipments in the quarter were roughly 0.5 million metric tons, up 1.4% year over year. Third-party revenues were $1.9 billion, up 6.7% year over year. The segment posted ATOI of $103 million, which increased 4.5% year over year and 30.4% sequentially. The sequential jump was due to higher metal prices, seasonal demand for can sheet in North America and productivity. The segment will continue to increase production in the fourth quarter to cater to the growing demand for aluminum intensive vehicles. Engineered Products and Solutions - Shipments in the quarter were 0.06 million metric tons, up 6.7% year over year. The segment posted ATOI of $209 million (a quarterly record), up 8.9% year over year and 2.5% sequentially. The sequential results were driven by favorable productivity. Financial Position Alcoa s cash and cash equivalents stood at roughly $3,272 million (including the net proceeds of $2.45 billion of the public offerings of notes and mandatory convertible preferred stock represented by depositary shares to fund the proposed acquisition of Firth Rixson) as of Sep 30, 2014, a more than three-fold rise from $1,017 million as of Sep 30, Alcoa had a debt-to-capital ratio of 37.3%, compared with 34.5% in the year-ago quarter. Portfolio Transformation In order to meet the aerospace industry s growing demand for lighter, next generation materials, Alcoa recently opened the world s largest Aluminum-Lithium (Al-Li) plant in Lafayette, IN. The new facility has already contracted $100 million in Al-Li revenues for Alcoa also announced two multi-year contracts worth more than $2 billion combined with Boeing and Pratt & Whitney in the third quarter. In the company s Global Rolled Products segment, production in its Davenport, IA facility continues to ramp up in order to better serve automotive demand and supply Ford with high strength automotive sheet made with a military-grade aluminum alloy for the new F-150. The auto expansion in Alcoa, TN has been slated to open in mid Equity Research AA Page 8

9 In the Wheels and Transportation Products business, Alcoa rolled out its lightest ever heavy-duty truck wheel in Europe to help fleets increase payload and fuel efficiency. The Ultra ONE with MagnaForce alloy will be available in Europe during second-half Strategic Actions During the quarter, Alcoa announced its plans to permanently close its primary aluminum smelter in Portovesme, Italy, which has been curtailed since Nov This will reduce Alcoa s global smelting capacity by 150,000 metric tons. The company also completed the previously announced closure of the 190,000 metric ton Point Henry smelter in Australia. Further, Alcoa landed an agreement for Sural Laminated Products of Canada, Inc. to purchase the 90,000 metric ton Becancour, Quebec rod mill. To further optimize the Alumina business, Alcoa signed a non-binding letter of intent in the previous quarter to pursue the sale of its ownership interest in Alcoa Minerals of Jamaica, L.L.C. (AMJ), which operates a bauxite mine and an alumina refinery. Furthermore, Alcoa and the Government of Suriname have signed a Memorandum of Understanding committing both parties to a strategic review of the Company s Suralco operations. In Saudi Arabia, progress continues at the Ma aden-alcoa joint venture. The smelter is now fully operational and generated profits in the reported quarter. The refinery, which will be the lowest-cost globally, is 98% complete and the bauxite mine is 73% complete. Outlook Alcoa backed its expectations of 8% 9% global growth in the aerospace sector in 2014 on the back of strong demand for both large commercial aircraft and regional jets. The company tightened its expectation for global automotive production growth to a band of 2% to 4% from its previous view of 1% to 4%. For the industrial gas turbine market, Alcoa continues to expect a decline of 8% to 12% on lower orders for new gas turbines and spare parts. It reiterated its expectation for global packaging sales growth of 2% to 3% and global building and construction sales growth of 4% to 6% in Alcoa raised its 2014 expectations for the North America commercial transportation market to a range of 16% to 20%, from the earlier range of 10% to 14% partly due to rising truck orders and backlogs. It expects the transportation market to remain steady (-1% to 3%) in 2014 due to weakness in the European market. Alcoa expects a global aluminum deficit of 671,000 metric tons in 2014 and a further tightening of the alumina market, with a surplus falling to 389,000 metric tons from 824,000 metric tons in second-quarter VALUATION Currently, Alcoa s shares are trading at 13.9x our 2015 EPS estimate of $1.14. The company s current trailing 12-month earnings multiple is 17.2x, compared with 18.6x for the S&P 500 and 13.2x for the peer group. Over the last five years, Alcoa s shares have traded in the range of 10.1x to 55.3x trailing 12- month earnings. On a P/E basis, the stock is trading at a modest discount to the peer group based on the estimated earnings for Our long-term Neutral recommendation on the stock indicates that it should perform in line with the broader market. Our price target of $17 is based on 14.9x our 2015 earnings estimate. Equity Research AA Page 9

10 Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF (TTM) P/E (TTM) P/E 5-Yr High (TTM) P/E 5-Yr Low (TTM) Alcoa Inc. (AA) Industry Average S&P American Lithium Minerals Inc. (AMLM) Passport Potash Inc. (PPRTF) Freeport-McMoRan Copper & Gold Inc. (FCX) Southern Copper Corp. (SCCO) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE (TTM) D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA (TTM) Alcoa Inc. (AA) Industry Average S&P Equity Research AA Page 10

11 Earnings Surprise and Estimate Revision History Equity Research AA Page 11

12 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1106 companies covered: Outperform %, Neutral %, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AA Page 12