gm5 10.06.2015
TRANSCRIPT
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USIT Lost and Found• 1 Gray Water Bottle
• 1 Black Mini Umbrella
• 1 Notebook from Analyst Orientation
General Meeting #510.6.2015University Securities Investment Teamtexasusit.org
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Agenda• General Announcements• Market Update• Austin Partridge
• Portfolio Update• Cliffe Kim
• Lecture: Good Pitch, Bad Pitch• Vishal Bhat
• Stock Pitch: Alcoa, Inc. (AA) • SCG Director: Mark Albin• GM’s: Brian Minkus, Yash Samant, Reese Davis,
Clayton Kurpiewski
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General Announcements
• First TWO meetings are free!• Analyst Groups: Senior Analysts will be reaching
out this week• Email [email protected] for WSJ log-in
information• UCF Workshop: Introduction to Options• Thursday, Oct 1st – CBA 4.328, 7-8pm
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USIT Social! • The Picnic• Friday, October 16th • 6pm – 8pm • Transportation/bus details to come• RSVP on Facebook!
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USIT Career Panel• Thank you to all the
USIT seniors for participation on the Career Panel!
• Keep an eye out for USIT Spring Career Panel!
05/02/2023
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Upgrade Capital
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Upgrade Capital
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Upgrade Capital
Roden Case CompetitionTopic: Disaster ReliefPrize Money: $3k to 1st, $2k to 2nd, $1k to 3rd
Sign up now!: goo.gl/forms/8qaFJ9fUbJFacebook: http://tinyurl.com/omqozxn
Dates• Accenture Case
Workshop: October 8th, 7pm-9pm @ JGB 2.216• Deadline to sign
up: October 9th, 11:59pm• Competition:
October 17th, 7am - 9pm @ SEA
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Recruiting
• Goldman Sachs – Special Situations Group• Dallas office• “…principal investing arm
specializing in underwriting debt and structured equity.”• Information Session
• Date: Thursday, October 8th
• Time: 5:30-6:30pm • Room: UTC 3.102• OCR Resume Drop Deadline:
October 12th • [email protected]
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Recruiting
• Juniors interested in investment banking • New York/Houston offices• Summer Analyst Presentation• Date: Thursday, October 8th
• Time: 7-8pm • Room: UTC 3.104
Market UpdateAustin Partridge
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Guess
TRANS-
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Trans-Pacific Partnership
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Trans-Pacific Partnership
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TPP Winners and Losers
WinnersVietnamJapanAustralia
LosersChina
??USA??
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Fed Update
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Fed Update
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Other News• Shell exits Arctic
• Google antitrust scrutiny
• Volkswagen bad
• American Apparel bankruptcy
• Russian involvement in Syria
Portfolio UpdateCliffe Kim
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Portfolio PerformanceUSIT Portfolio Current Value: $ 11,659.96
10d Performance Index Comparison
(-2.68)%+2.23%(-0.37)%+0.35%
500
2000
Name Price 5d Chg ($ · %) Mkt Value Total Chg ($ · %) 52wk Low 52wk High
AAL American Airlines 38.13 -39.78 · -7.43% 495.69 46.28 · 10.30% 28.10 56.20
AAPL Apple 111.31 -43.89 · -1.84% 2337.51 879.18 · 60.29% 92.00 134.54
ACC American Campus 37.18 20.80 · 5.93% 371.80 13.50 · 3.77% 32.12 45.38
AGX Argan 35.96 -10.15 · -0.80% 1258.60 499.10 · 65.71% 28.62 42.50
BABA Alibaba Group 63.92 10.25 · 3.31% 319.60 -88.10 · -21.61% 57.20 120
BBRY BlackBerry 6.78 -47.00 · -6.48% 678.00 -359.00 · -34.62% 5.96 12.63
FNMA Fannie Mae 2.41 15.73 · 4.78% 344.63 -174.46 · -33.61% 0.01 3.51
GENC Gencor 9.44 23.50 · 5.59% 443.68 -55.46 · -11.11% 8.90 10.17
GILD Gilead Sciences 97.54 -44.85 · -8.42% 487.70 -25.30 · -4.93% 85.95 123.37
AJRD Aerojet Rocketdyne 17.37 -103.00 · -10.60% 868.50 17.50 · 2.06% 15.11 24.35
IDT IDT Corporation 14.13 -65.25 · -5.80% 1059.75 -291.75 · -21.59% 13.26 23.24
MUSA Murphy USA 55.35 20.85 · 2.58% 830.25 240.75 · 40.84% 47.73 73.97
PTC PTC Inc. 34.03 4.00 · 1.19% 340.30 2.20 · 0.65% 30.53 42.75
RNET RigNet 29.06 3.60 · 1.25% 290.60 -163.60 · -36.02% 23.37 47.37
SLCA U.S. Silica 15.78 -26.85 · -10.19% 236.70 -190.80 · -44.63% 13.48 55.29
SWKH SWK Holdings 1.42 -12.00 · -2.07% 568.00 120.00 · 26.79% 1.17 4.5
TRN Trinity Industries 24.94 8.45 · 2.68% 324.22 -74.88 · -18.76% 21.78 42.08
HLT Hilton Worldwide Holdings 23.79 1.87 · 0.46% 404.43 -34.00 · -7.75% 20.72 31.60
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Aerojet Rocketdyne (AJRD)• California-based rocket/missile propulsion
manufacturer• Highly volatile 2-weeks, ended with -10.60%• Was in a fight for ULA contracts last time• Major announcement made last last
Tuesday night
Сделано в России
Atlas V
Vulcan
Orbital ATK: "sole provider" of solid rocket boosters for VulcanBlue Origins: “expand production capabilities for the BE-4 engine for Vulcan”
???AJRD: Currently legacy providerNew engines = More competition
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Blackberry (BBRY)• Canada-based mobile communications
company that is slowly dying• Announced new mobile phone – Priv
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BlackBerry (BBRY)• Announced Android BlackBerry to
address consumer app shortage for BlackBerry OS• Concerns:
• Will it weaken BlackBerry security?• Oversaturated Android market
• Falling performance numbers• Revenue: Q2 2015: $490M, Q2 2014:
$916M• Handset Sales: Q2 2015: 800K, Q2 2014:
2.4M• Reduced Handset Forecast by Half• Numerous Analyst downgrades
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BlackBerry (BBRY)Good News:• Ample liquidity: $3.35B in Cash/Investments
• $1.3B in long-term debt
• Positive cash flows from operations
• 19% Growth in Services/Software
• Aggressive Acquisitions• Movirtu, SecuSmart, WatchDox, AtHoc and Good
Technology
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U.S. Silica (SLCA)• Leading producer of industrial minerals,
such as silica sand• Silica Sand: High-purity, durable, and
very round grains
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U.S. Silica (SLCA)• Falling Stock Prices: (-27.7%) in
September
• Falling oil prices (-8.5%)• Falling oil rig count• Oversupply in frac sand
• Jefferies: Downgrade, Price Target $14• RBC: Downgrade, Price Target $20
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RigNet (RNET)• Leading communications provider for
oil/gas industry
Contract: “premium global offshore drille
r”
Contract: “major European-based offshore drille
r”
Contract: Exclusive distrib
ution agreement
Lecture:Good Pitch, Bad PitchVishal Bhat
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Pitching 101
Growth Investing
Value Investing
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Pitching 101
Growth Investing
• Not concerned with present valuations
• Future growth potential
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Pitching 101
• Things don’t grow forever…
Growth Investing
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Pitching 101
Value Investing
• Good business at a great price• Concerned with present value• Need a clear variant view• Need a clear catalyst
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Sourcing Ideas• Price is a function of supply and demand• For stocks to be priced below fair value, demand
must fall• What causes a stock to fall out of favor?• Unfavorable macro trends• Success of a competitor• Change in management• Regulatory scrutiny • Negative PR• Randomness
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Components of a Pitch• Investment Thesis• Company Overview• Industry Overview• Valuation• Intrinsic• Relative
• Risks and Mitigations
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Components of a Pitch• Investment Thesis
**The most important part of any pitch**
• If you don’t understand the thesis, ask questions• If you STILL don’t understand the thesis, don’t vote yes
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Components of a Pitch• Investment Thesis
What makes a good investment thesis?
Clear, logical, and defensible
argument
Stock has a low level of
analyst coverage
Identifiable catalyst for
value creation
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Components of a Pitch• Investment Thesis
What makes a bad investment thesis?
Not a variant view; too obvious
Posing a growth thesis
as a value thesis
Neglecting to address the bear case
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Components of a Pitch• Company Overview
What the hell does this company do?
• Checklist:• Do I understand how this company makes money?• Do I understand what this company spends money
on?• Do I trust management?
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Components of a Pitch• Industry Overview
What environment does this business operate in?
• Checklist:• Who are the major competitors?
• What’s our competitive advantage?• What are the major drivers of this industry?
• Porter’s Five Forces
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Components of a Pitch• Valuation: Comps
Why is this company a better investment than its peers?
• Checklist:• What are the appropriate metrics to measure the
success of this business?• Is this business cheap relative to its competitors?
• If it is more expensive, is there a clear justification?
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Components of a Pitch• Valuation: DCF
• Pros• Quantitative defense for thesis• Educational opportunity• Scenario analysis• Can easily pinpoint where variant view lies
• Cons• Based on numerous “dart-throwing” assumptions• Easy to manipulate• Meaningless in a vacuum
Never let a DCF be the deciding factor in your vote; good to have, good to question,
bad to worship
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Components of a Pitch• Risks and Mitigations
What could go horribly wrong with this company?
• Checklist:• Did the team address realistic risks, internal and
external?• Am I comfortable taking said risks?
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Q&A• When a pitch is over, what is appropriate to ask?
• Clarifying questions:• Could you explain what a REIT is? (HLT)
• Scenario analysis• Is your thesis valid if interest rates do not rise in the next six months?
(TRV)• Weak mitigations
• You mentioned that a risk would be oil prices falling below $30 – if that happens, how much would the company suffer?
• Valuation concerns• Why is revenue pacing upwards at 20% a year?• Why is this company 2.5x more expensive than its next biggest
competitor?This is YOUR money and YOUR investment –
ask questions and make sure its being put to good use.
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Q&A• When a pitch is over, what is NOT appropriate to
ask?• Multi-layered questions• Focusing on the minutiae • Really dumb questions
• What’s the name of the company?• Unnecessarily picky DCF questions
• Your gross margin is 25.47% but don’t you think it should be closer to 25.44%???
Listen to other people’s questions; be open-minded, but don’t change your mind the
second someone asks a question
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How to Vote• When to vote YES
• I like and understand the investment thesis• That DCF was clearly made 20 minutes beforehand but I still like
and understand the investment thesis• The Q&A addressed a lot of my concerns, now I’m confident in this
idea• When to vote NO
• The Q&A brought up some very real concerns and I don’t have a lot of conviction in this idea anymore
• I don’t believe in the investment thesis• I still don’t understand the investment thesis• Hilton’s nightly rates are outrageous, I refuse to support them
• When to ABSTAIN• Fell asleep during pitch• Both sides made a lot of good points, idk. • My phone/laptop died, can’t vote, oops.
Stock Pitch: Alcoa, Inc. (AA)SCG Director: Mark AlbinPitch Team: Reese Davis, Clayton Kurpiewski, Yash Samant, Brian Minkus
Alcoa – AA (NYSE) 80% upsideYash Samat, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director
Alcoa – AA (NYSE) 80% upsideYash Samant, Brian Minkus, Clayton Kurpiewski, Reese Davis – AnalystsMark Albin - Director
AlcoaThesis
Alcoa is splitting its value chain into two distinct sections. This will allow management
to focus on higher-margin projects
Alcoa sells products not easily commoditized
Long-term contracts are not recognized by a commodity-panicked market
Industry Overview
Jan-10Mar-
10May-
10Jul
-10Oct-
10Dec-
10Feb
-11May-
11Jul
-11Se
p-11
Dec-11Feb
-12Ap
r-12Jun
-12Se
p-12
Nov-12Jan
-13Ap
r-13Jun
-13Au
g-13
Nov-13Jan
-14Mar-
14May-
14Au
g-14Oct-
14Dec-
140
500
1000
1500
2000
2500
3000
Aluminum Price
Date
Alum
inum
Pric
e (U
SD/t)
Favorable Market ConditionsCommodity Price of Aluminum
Stable
Growth From Specialized Industries
Volatility Protection
Company Partnerships Well Positioned Aluminum Worldwide
China risk minimal
Strong demand in NA and Europe drive sales.
Use overcomes priceAluminum in the U.S.
YOY use of aluminum increases in U.S automobiles.
U.S vehicles must become lighter to meet new emissions standards
Company Overview
Existing Alcoa shareholders will receive stock in both
Delivering Shareholder Value
Value-Add Co. Upstream Co.Premier supplier of high-performance multi-material products and solutions
Positioned to grow in diversified set of growth markets
Robust margins and investment opportunities above cost of capital
Expanded multi-material, technology and process expertise
Robust demand growth of 6.5% in 2015 and 2x between 2010 and 2020
World’s largest, low cost bauxite miner at the 19th percentile on cost curve
Operational flexibility to profit from market cyclicality
Collaborate to produce next-gen automotive aluminum alloys with key
manufacturers
Positioned for growth from horizontal monopolistic structure
Competitive Advantage
Turn Into Aluminum Based Products
Sell to Manufactures
Company 1:Upstream
Company 2: Value-Added
Distribution of Revenue Now
51%27%
15%
7%% Sales - Location
United StatesEuropePacificOther Amer-icas
29%
26%
23%
14%8%
% Sales - Segment
Global Rolled Products
Primarty Metals
Engineered Products and Solutions
Alumina
Other
Valued-Added Co. Strong Top +Bottom Line Growth Insulated from Market
Dow Jones U.S. Aluminum Index
Isolated from highly volatile market conditions--long term manufacturing contracts and control over cost of raw materials.
Company Overview: Value-Add Co: Key Businesses
Highly Diversified
Value-Added Co: Increase in Demand for Parts from Key Industries
Company Overview: Upstream Co: Continued Drive for ProfitabilityStrong Growth Despite Falling Commodities Prices
Strengths: Impeding division of the company Diversified set of customers for aluminum products Insulated from volatile commodity prices Horizontal integration of mining and production operations
Weakness: Division execution risk
Threats: Rising energy prices(i.e. natural gas) Global market weakens
Opportunities Automotive Lightening Micro mill alloy produced in conjunction with Ford Increase in demand for aluminum parts from aerospace manufacturers
SWOT Analysis Indicated Opportunities in Emerging Industries
Company Overview
In the NewsCatalysts – 3yr time horizon
Alcoa signed a $1 billion contract with Airbus
Alcoa’s quarterly earnings release on Thursday
10/3/
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Price
Valuation
Comps
Company Comps
Ticker Name P/E Total Debt (in mm) Total Equity (in mm) Debt/Equity P/BV NTMTEV/EBITDA NTM 2015 Total Revenue (in mm)
NYSE:AA Alcoa Inc.16.4 8,846.0 14,794.0 0.60 1.80 6.3 24,332.0
NasdaqGS:KALU Kaiser Aluminum Corporation16.3 225.2 758.8 0.30 2.00 9.5 1,415.8
NasdaqGS:CENX Century Aluminum Co.4.4 254.7 1,091.2 0.23 0.40 1.8 2,163.3
NYSE:CSTM Constellium 13.49 1,205.0 (41.4) -29.11 NM 9.1 5,193.7
Nucor16.0 4,360.6 8,075.0 0.54 2.70 7.9 21,105.1
Average 13.3 0.42 1.725 6.9
DCF 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019E
Sales $ 21,013 $ 24,951 $ 23,700 $ 23,032 $ 23,906 $ 24,332 $ 23,062 $ 24,135 $ 25,100 $ 26,819 $ 27,423
% change 19% -5% -3% 4% 4% 5% 4% 2% 2%
Cost of Goods Sold $ (17,116) $ (20,474) $ (20,401) $ (19,277) $ (19,070) $ (18,946) $ (17,988) $ (18,825) $ (19,578) $ (20,918) $ (21,390)
Gross Profit $ 3,897 $ 4,477 $ 3,299 $ 3,755 $ 4,836 $ 5,386 $ 5,074 $ 5,310 $ 5,522 $ 5,900 $ 6,033
Sales, general, and administrative $ (961) $ (1,027) $ (997) $ (1,008) $ (953) $ (928) $ (922) $ (965) $ (1,004) $ (1,073) $ (1,097)
Other operating charges $ (174) $ (184) $ (197) $ (192) $ (218) $ (240) $ (231) $ (241) $ (251) $ (268) $ (274)
EBITDA $ 2,762 $ 3,266 $ 2,105 $ 2,555 $ 3,665 $ 4,218 $ 3,921 $ 4,103 $ 4,267 $ 4,559 $ 4,662
Depreciation and Amortization $ (1,450) $ (1,479) $ (1,460) $ (1,421) $ (1,371) $ (1,322) $ (1,384) $ (1,448) $ (1,506) $ (1,609) $ (1,645)
EBIT $ 1,312 $ 1,787 $ 645 $ 1,134 $ 2,294 $ 2,896 $ 2,537 $ 2,655 $ 2,761 $ 2,950 $ 3,017
Taxes $ (148) $ (255) $ (162) $ (428) $ (320) $ (620) $ (761) $ (796) $ (828) $ (885) $ (905)
NOPAT $ 1,164 $ 1,532 $ 483 $ 706 $ 1,974 $ 2,276 $ 1,776 $ 1,858 $ 1,933 $ 2,065 $ 2,112
Depreciation and Amortization $ 1,450 $ 1,479 $ 1,460 $ 1,421 $ 1,371 $ 1,322 $ 1,384 $ 1,448 $ 1,506 $ 1,609 $ 1,645
Change in Net Working Capital $ 528 $ (63) $ 77 $ 276 $ (795) $ (592) $ (165) $ 10 $ (208) $ (45) $ 78
CAPEX $ (1,015) $ (1,287) $ (1,261) $ (1,193) $ (1,219) $ (1,266) $ (1,153) $ (1,207) $ (1,255) $ (1,341) $ (1,371)
Unlevered Free Cash Flow $ 2,127 $ 1,661 $ 759 $ 1,210 $ 1,331 $ 1,740 $ 1,841 $ 2,110 $ 1,976 $ 2,288 $ 2,464
AV:
COGS/Sales -81.5% -82.1% -86.1% -83.7% -79.8% -77.9% -83% 78% 78% 78% 78% 78%
SG&A/Sales -4.6% -4.1% -4.2% -4.4% -4.0% -3.8% -4.3% 4% 4% 4% 4% 4%
Other/Sales -0.8% -0.7% -0.8% -0.8% -0.9% -1.0% -0.8% 1% 1% 1% 1% 1%
D/A Sales -7% -6% -6% -6% -6% -5% -6.2% 6% 6% 6% 6% 6%
Tax Rate -11% -14% -25% -38% -14% -21% -20.5% 21% 21% 21% 21% 21%
CAPEX/Sales -5% -5% -5% -5% -5% -5% -5.1% 5% 5% 5% 5% 5%
DCF and Implied Discount
Beta: 1.11Equity Risk Premium: 6%Risk Free Rate: 2%Cost of Equity: 6.44%Cost of Debt: 4%Cost of Preferred Equity: 5%Dividend: $ 3.75 Preferred Share Price: $ 81.02 Market Value of Debt: $ 8,789.00 Market Value of Equity: $ 12,256.00 Market Value of Preferred Equity: $ 58.00 WACC: 5.42%
WACC: 5.4% Growth Rate: 2% 2010A 2011A 2012A 2013A 2014A 2015LTM 2015P 2016E 2017E 2018E 2019EUnlevered Free Cash Flow: $ 2,127.00 $ 1,661.00 $ 759.00 $ 1,210.00 $ 1,331.00 $ 1,740.00 $ 1,841.39 $ 2,109.73 $ 1,975.72 $ 2,288.21 $ 2,463.80 PV of FCF: $ 9,076.78
Multiple 6.31 PV of Terminal Value (Multiple): $ 22,594.50 % of Enterprise Value: 0.76805928 Enterprise Value $ 31,671.28 Enterprise Value $ 31,671.28 Implied Equity Value: $ 21,811.28 Implied Share Price: $ 18.79
Implied Discount: 80%
Risks and Mitigants
Not Just a Mining CompanyRisks and Mitigants
Demand RiskEmission Standards
Aluminum Prices
Energy RequirementsEnergy Prices
Decreased Reliance
Split Execution RiskMulti-year Process
No loss of coverage
Conclusion
Appendix
Why DCF for mining company? Why not Net Asset Value? Alcoa has so much aluminum in house that it doesn’t even bother
figuring out how much it has in reserves. Most of the company literature is based in EBITDA and their operating performance metrics are on a cash-flow basis
Your Implied Discount is Pretty High....why? The company has been adversely hit by a commodity bust that doesn’t
really affect it’s ability to price Can you tell me more about this split?
The details have yet to be released....the process has yet to be cleared by the Feds, but the project has been years in the making and management has assured equity holders they will get equal rights in both companies
Your comparables don’t seem like they reflect Alcoa Not many companies own their entire value chain....we considered doing
a sum-of-parts analysis, but figured it wouldn’t be appropriate if we didn’t have synergy information from the company yet
We Know You Have Questions...
Vote: texasusit.org/portfolioVoting opens after DCF Analysis