Alcoa Inc. (AA: 10.395 +0.055 +0.53%), the world’s leading producer of primary aluminum, fabricated aluminum and alumina, has agreed to purchase privately held Traco (Three Rivers Aluminum Company), a premier maker of windows and doors for the commercial building and construction market.Traco specializes in engineering, extrusion, finishing and electrostatic painting, glass insulation and tempering, and glass lamination for doors and windows. The company was involved in the recent restoration of the Statue of Liberty, replacing 25 windows in the crown of the landmark.
Alcoa plans to add Traco to its global Building and Construction Systems business under its Engineered Products and Solutions segment, which contributes about 25% to total revenue. Under this segment, Alcoa provides architectural systems, services and building products to the construction market, serving customers across North America, Europe, North Africa, Asia and the Middle East. The Kawneer brand in the segment develops and sells windows, doors, curtain walls, sliding patio doors and conservatories throughout the world. The transaction is expected to be completed by the end of the third quarter. Other terms of the deal were not disclosed.
We are not overly optimistic on Alcoa’s new venture as its performance in the past few quarters has not been impressive. The company is facing lower aluminum prices and higher input costs. In our view, Alcoa’s near- to medium-term profitability is likely to come under pressure from rising energy and caustic soda costs. We also believe that the depreciation of the U.S. dollar is likely to translate into higher costs for Alcoa’s Australian, Canadian and European operations.
Additionally, higher restructuring charges are pressuring margins of the company. Alcoa’s share price has declined consistently over the last couple of months after it reported first-quarter 2010 results. We believe the company’s weak performance will continue for the rest of 2010. We maintain an Underperform recommendation on Alcoa, supported by the short-term (1 to 3 months) Zacks Rank #4 (“Sell”).
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