Alcoa Has the Right Playbook

 | Jul 09, 2014 | 11:26 AM EDT
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Companies can reinvent themselves, provided that they have a clear vision of what has to happen and the will to take tough actions to get costs in line.

That's exactly what Alcoa (AA) is doing, and it's doing so in spectacular fashion. It's worth talking about the playbook that Klaus Kleinfeld has put in place, because in many ways it is replicable by other CEOs who want to turn their sleepy, underperforming companies into powerhouses and want to do so themselves, without any push from activists or without any fancy tax changes that allow them to break free from the onerous U.S. corporate tax provisions.

For years, Alcoa has been plagued by costly factories that fashion the commodity portions of aluminum, while at the same time it has lacked the power of innovation, finding uses for this one-time wonder metal that have been usurped by all sorts of other materials.

Kleinfeld is tackling both issues at the same time. He is lowering the cost of alumina and aluminum smelting by closing uncompetitive plants in locations where labor and energy are both problematic. That has moved Alcoa down the cost curve of these commodities, making the company much more competitive and boosting earnings per share, even as Kleinfeld takes down revenue numbers. Revenue-obsessed investors might be frustrated, but that's nonsense. As long as Alcoa is a high-cost producer, it is doomed to be a second-rate company.

More important, Alcoa has become what Kleinfeld calls a "lightweight multi-material innovation powerhouse." Alcoa is developing new kinds of aluminum that offer superior weight and even strength characteristics that allow customers to manufacture energy-saving products, such as lighter aircraft, autos and trucks. This is a huge displacement that involves Kleinfeld dealing at the highest levels with the manufacturers, rather than just letting the customer procurement departments run the show.

Almost every single market in which Kleinfeld is operating has terrific growth, whether it be autos, trucks, non-residential construction or aerospace. It's the latter that's most exciting because of a terrific acquisition of Firth Rixson, a company that gave Alcoa twice the engine content in almost all of the commercial planes being manufactured right now. Given the nine-year backlog in these kinds of planes, it is hard to imagine an end-market more worth being levered to.

For years I have bemoaned that Kleinfeld is not getting credit for what he has done, as the stock has been a terrible performer and suffered the indignity of being kicked out of the Dow Jones Industrial Average not that long ago. But there has been some sweet revenge, as the stock has more than doubled in less than a year's time.

There are lots of false reports why that doubling is occurring, everything from the increase in price of the raw metal, something that's not even true, to the sale of power to augment earnings. You can't make this stuff up. The reasons for the double are clear: the closing of plants that were thought to be un-closeable for political reasons, and plain old creativity, making the end-product stronger and lighter, and then selling it to customers that now clamor for it.

That's the Alcoa transformation, and, fortunately for shareholders, it's just beginning. Well done, Klaus Kleinfeld. You've pulled off what many thought was impossible: a reinvention of a company that was long left for dead. It's a textbook case of how to make it all happen, and it's inspirational for any business person or investor trying to figure out what to do to create real value right before our eyes. 

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