Ford and Alcoa's Micromill Agreement Largely Positive for Both Companies - Stifel (F) (AA)

Stifel is out with commentary on Ford (NYSE: F) and Alcoa (NYSE: AA) following news late Monday that the two companies would collaborate to produce next-generation automotive aluminum alloys that are more formable and design-friendly.

On Alcoa, analyst Paul Massoud said, Alcoa first unveiled its Micromill technology in December 2014 after having completed successful customer product trials (presumably with Ford). The technology has multiple advantages. In addition to formability and strength improvements, production time is greatly reduced from 20 days to 20 minutes, energy consumption is halved, and the facility is able to shift between automotive, industrial and packaging output depending on demand. Currently, in addition to the Micromill pilot plant in San Antonio, Alcoa produces automotive products from its Davenport and Tennessee plants. Automotive revenue is expected to grow from $750 million in 2014 to $1.8 billion in 2018 (vs. total GRP revenues of $7.4 billion in 2014). In our view, GRP profits from automotive will be 40% higher than from packaging, implying a significant step up in ATOI margins by 2018 (which averaged about 9%). We see this as further evidence that Alcoa continues to move away from upstream commodity businesses and toward value-add metal price neutral downstream businesses serving the automotive (as well as aerospace) industries. We maintain our Buy rating on AA shares and our $18 target price, which we derive by using a sum-of-the-parts analysis.

For Ford and automotive OEM peers, analyst James Albertine commented, We have applauded Ford management for taking a more pronounced, and decidedly risky, approach to increasing its usage of lighter-weight, advanced materials in its production process. By electing to begin this process with the industry leading Ford F-Series line of pick-up trucks (approaching 800-900k units sold annually), we believe Ford’s efforts would prove the definitive test for all auto OEMs as they ponder light-weighting in efforts to achieve more stringent global fuel economy standards. As the F-Series investment process spanned two facilities, several years of disruption and billions of dollars of capital risk, we believed if successful, Ford would be well positioned relative to peers. This argues for a multiple year competitive advantage. We believe this announcement demonstrates further scalability of this already significant advantage to peers.

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