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|Alcoa Inc. |(AA-NYSE) | $26.51 |

Note to Readers: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q16 Earnings Update.

Previous Edition: Aug 3, 2016; 2Q16 Earnings Update.

Brokers’ Recommendations: Positive: 45.45% (5 firms); Neutral: 45.45% (5); Negative: 9.10% (1) Prev Ed: 7, 4

,1.

Brokers’ Target Price: $32.25 (↑ $21.16 from last edition; 10 firms) Brokers’ Avg. Expected Return: 21.7%

Portfolio Manager Executive Summary

Alcoa Inc. (AA) is a producer of alumina and aluminum, and operates in over 31 countries. Alcoa serves the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial markets, providing customers with design, engineering, production, and other services.

Of the 11 brokerage firms covering the stock, 5 (45.45%) conferred positive ratings and 5 (45.45%) assigned neutral ratings, while 1 firm (9.10%) provided a negative rating to the stock.

Buy or equivalent outlook – (5/11 firms or 45.45%) – These firms consider that the separation remains on track, and hidden assets continue to drive a stock discount. They believe that there are many opportunities to create value post-split between improved EPS margins and strategic alternatives for the upstream. The company’s fundamentals in key markets remain very strong, particularly commercial aerospace demand is healthy with an order book in excess of nine years and the aluminization in automotive space continues. The company is well poised to further increase its market position and grow profitably. To mitigate the impact of the low pricing environment, Alcoa continues to review both refining and smelting capacity to reduce costs.

Neutral or equivalent outlook – (5/11 firms or 45.45%) – The firms believe that in spite of near-term market challenges, Arconic segments reported combined year-over-year profit growth, and Alcoa Corporation segments, Alumina and Primary Metals, maintained profitability sequentially despite continued low alumina and aluminum pricing by proactively managing costs and capacity.

Negative or equivalent outlook – (1/11 firms or 9.10%) – The firm believes that aluminum selling prices will remain weak, thereby affecting the company’s earnings.

Oct 18, 2016

Overview

Key investment considerations as identified by the analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Compelling fundamentals: Alcoa is witnessing strong momentum in aerospace |External factors: Alcoa’s stock is deemed vulnerable to currencies like |

|and auto markets and is actively pursuing its aerospace expansion |the C$, AU$, Brazilian real, as well as high resin and energy costs (for |

|strategy. The bullish analysts expect the current growth initiatives to |the smelter) as a considerable portion of its revenues is linked to |

|benefit Alcoa. |international operations. In case of a recession, along with low aluminum |

| |prices and soft demand for engineering products, revenues and earnings |

|Financials: Alcoa expects to offset cost pressure with cost-cutting |could suffer. |

|initiatives as well as improved aluminum market fundamentals. Further, | |

|upside to ROIC can come from asset divestitures and reduction in costs. |Increased costs: Higher input costs due to energy, healthcare and freight |

| |expenses could reduce profitability. |

|Other: Positive trends in key terminal markets are expected to improve the| |

|balance sheet. |Other: Local and federal governments regulate Alcoa’s mines. A change of |

| |regulations could expose the company to additional remediation or |

| |compliance costs. |

Pennsylvania-based Alcoa is the world's largest producer of aluminum with vertically-integrated operations that include bauxite mining, alumina refining, and aluminum smelting. Products include primary aluminum, fabricated aluminum, and alumina (the principal ingredient in aluminum), which are sold to manufacturers in industries ranging from packaging, aerospace, construction, automobiles, transportation, as well as to manufacturers of a wide range of industrial and consumer products. Alcoa also markets consumer brands including Reynolds Wrap, Alcoa wheels, and Baco household wraps.

Alcoa’s other businesses include closures, fastening systems, precision castings, and electrical distribution systems for cars and trucks. Though the company’s clients are mostly concentrated in North

America, Europe comprises its second-largest client base. Alcoa has 59,000 employees in 31 countries across the world.

Further information on the company is available at its website .

NOTE: Alcoa’s fiscal year coincides with the calendar year.

Oct 18, 2016

Long-Term Growth

Long-term growth is inextricably linked to commodity prices and the successful execution of upstream development projects. The analysts are positive about the company’s long-term strategy to idle high-cost production and replace it with low-cost capital and low-cost expansion projects.

Alcoa expects both near-term and long-term catalysts to help in the advancement of the aluminum market and current stimulus packages to increase demand by targeting infrastructure and energy efficiency. It believes that the collapse in demand has flooded the market with aluminum, and it will take some time for the overhang to diminish.

Alcoa continues to believe that increased urbanization provides a strong long-term outlook for aluminum. In addition, population growth is considered to be supportive of the metal’s long-term demand. Finally, environmental concerns and the need to reduce greenhouse gas emissions are seen by the company as aluminum demand drivers, going forward.

Management streamlined the portfolio to focus on businesses where Alcoa is the recognized leader. Moreover, management curtailed production to adjust to weakened demand, reduced global headcount and achieved significant savings in key raw materials. By moving quickly to tackle the market decline, management is using Alcoa’s strategic flexibility and solid liquidity to address the continuing economic uncertainty and emerge even stronger when the economy recovers.

The firms believe that the significant amount of costs that management has cut from the business and investments in low-cost production facilities and efforts to break the linkage between alumina prices and the LME price for aluminum will benefit earnings over the long term.

Oct 18, 2016

Target Price/Valuation

The Zacks Digest average price target is $32.25 (↑ $21.16 from the previous report, up 21.7% from the current price).

|Rating Distribution |

|Positive |45.45% |

|Neutral |45.45% |

|Negative |9.10% |

|Avg. Target Price |$32.25 |

|Digest High |$39.00 |

|Digest Low |$24.00 |

|No. of Analysts with Target Price/Total |10/11 |

Although the company has divested a number of non-core businesses, restructured several businesses, curtailed production capacity, and reduced its dividend and capital expenditures, risks include pressure due to tepid demand for industrial metals.

Recent Events

On Oct 11, 2016, Alcoa reported its 3Q16 results.

The company logged profits, as reported, of $166 million or $0.33 per share in 3Q16, a nearly four-fold rise from $44 million or $0.06 per share in the year-ago quarter.

Barring one-time items, earnings came in at $0.32 per share in 3Q16, up from $0.21 per share a year ago.

Revenues went down roughly 6% y/y to $5,213 million in 3Q16.

Revenue

Revenues went down roughly 6% y/y to $5,213 million in 3Q16, hurt by lower prices of alumina, unfavorable price and product mix and curtailment & closure of businesses.

Alcoa is splitting into two independent, publicly traded companies. The separation will result in the creation of two standalone entities – ‘Arconic Inc.’ and ‘Alcoa Corporation’. The separation is slated to become effective on Nov 1, 2016.

Arconic (Value Added Company)

After the company’s separation, the innovation and technology-driven Arconic will include Global Rolled Products (other than the rolling mill operations in Warrick, IN, and Saudi Arabia, which will move to Alcoa Corporation), Engineered Products and Solutions as well as Transportation and Construction Solutions. In 3Q16, these Arconic segments reported combined revenue of $3.4 billion, after-tax operating income (ATOI) of $267 million and adjusted EBITDA of $517 million.

Additionally, the combined Arconic segments generated $187 million in productivity as part of their business improvement programs, announced in 1Q16. Arconic segments are on track to deliver $650 million productivity savings in FY16.

Segment Details:

Engineered Products & Solutions (EPS): Revenues from the division inched up 0.6% y/y to roughly $1.4 billion in 3Q16 on the back of the RTI acquisition. ATOI increased around 7% y/y to $162 million on contributions from RTI acquisition and productivity gains, partially neutralized by unfavorable pricing and mix, higher costs and investments in growth projects.

Transportation and Construction Solutions (TCS): The segment’s sales fell roughly 5% y/y to $450 million in 3Q16. ATOI rose around 7% y/y to $47 million on productivity gains. Growth in this segment’s building and construction business was more than offset by the performance of its commercial transportation business, which remains challenged by softness in the North America heavy-duty truck market.

Global-Rolled Products (GRP): The GRP division is focused on capturing profitable growth opportunities in attractive market sectors and regions. The segment will now consist of four business units comprising Aerospace and Automotive Products; Brazing, Commercial Transportation and Industrial; Global Packaging; and Micromill Products and Services.

Sales slipped around 0.4% y/y to $1.5 billion in 3Q16. ATOI dropped around 6% y/y to $58 million, impacted by transformation of the Warrick rolling mill. Productivity gains and higher volumes in automotive were neutralized by higher costs, unfavorable product mix and pricing pressure in global can sheet packaging. Global Rolled Products continues to grow its automotive business and had a record quarter for automotive sheet shipments, soaring 49% y/y.

Arconic Segments Target Update

Alcoa has revised its outlook for GRP, EPS and TCS units (all part of Arconic) to reflect near-term industry challenges and currency impacts. For GRP, the company now expects revenues of $4.8 billion to $5 billion for 2016, down from $5 billion to $5.2 billion it expected earlier.

For EPS, the company expects sales of $5.6 billion to $5.8 billion for 2016, down from its earlier view of $5.9 billion to $6.1 billion. Alcoa also sees revenues from the TCS unit in the band of $1.7 billion to $1.8 billion, down from the prior view of $2.1 billion.

Alcoa Corporation Overview (The Upstream Company)

Following the company’s separation, Alcoa Corporation will comprise Bauxite, Alumina, Aluminum, Cast Products and Energy – Alumina and Primary Metals segments – as well as the rolling mill operations in Warrick, IN, and Saudi Arabia currently part of the Global Rolled Products segment. In 3Q16, the Alumina and Primary Metals segments reported revenue of $2.3 billion, ATOI of $128 million and adjusted EBITDA of $318 million.

In 3Q16, Alcoa Corporation continued to build its third-party bauxite business effectively. Alcoa World Alumina and Chemicals (AWAC) signed new third-party bauxite contracts valued at $53 million over the next two years for a total of $468 million year-to-date in FY16. The new contracts, which will triple Alcoa Corporation’s third-party bauxite sales in FY16 from FY15, will serve customers in China, the U.S., Europe and Brazil. AWAC is an unincorporated joint venture that consists of a group of companies, which are owned 60% by Alcoa and 40% by Alumina Limited of Australia.

Additionally, cumulatively the segments have generated $190 million in productivity in 3Q16 as part of their business improvement programs, and have surpassed their $550 million 2016 target.

In 3Q16, Alcoa also reported that it had exceeded its three-year 2016 target of moving down the global alumina cost curve. Further, it also achieved its global aluminum cost curve target.

Segments Details

Alumina:

Revenues slid around 25% y/y to $687 million in 3Q16. Production plunged around 16% y/y to 3.3 million metric tons. Additionally, shipments went down roughly 16% to 2.4 million metric tons. ATOI tumbled roughly 66% y/y to $72 million, hurt by lower alumina pricing and currency headwinds.

Primary Metal:

Sales slipped around 8% y/yto $1.1 billion in 3Q16. Shipments fell around 9% to 0.6 million metric tons. Production was roughly 0.6 million metric tons, around 16% decline from the prior-year quarter. ATOI was $56 million for the reported quarter, compared with a loss of $59 million a year ago.

Outlook

For aerospace, Alcoa anticipates strong market fundamentals to drive long-term demand. The company sees aircraft deliveries to be flat to up 3% for FY16.

The company continues to see global automotive production growth of 1%–4% for FY16. This includes 1%–2% growth in North America.

For the commercial transportation market, the company now expects global production to be flat to up 2% in FY16 (an improvement from the earlier view of -4% to -1%). Production growth in the heavy-duty truck, trailer and bus market in Europe and China is anticipated to be mostly offset by continued declines in North America.

Alcoa continues to expect 4–6% growth in the global building and construction market for FY16. For the packaging market, Alcoa now expects growth of 2–3% in FY16, an improvement from its earlier forecast of 1–3%. For the global airfoil market, Alcoa continues to witness 2–4% growth in FY16.

Moreover, Alcoa expects a global aluminum deficit of 615,000 metric tons and a global alumina deficit of 1.6 million metric tons for FY16. The company reaffirmed its global aluminum demand growth forecast of 5% for FY16. Global demand for aluminum is expected to grow faster than supply in FY16.

Separation Update

Alcoa, on Oct 5, 2016, completed its earlier announced 1-for-3 reverse stock split in preparation for its planned separation. Its shares started trading on a split-adjusted basis on Oct 6, 2016.

Alcoa’s board, on Sep 29, 2016, approved the completion of the company’s planned separation into two independent, publicly-traded companies. The proposed split has been scheduled to become effective before the opening of the market on Nov 1, 2016.

The separation will occur by means of a pro rata distribution by Alcoa of 80.1% of the outstanding common stock of Alcoa Corporation. Arconic will retain 19.9% of Alcoa Corporation common stock. The distribution has been planned as a tax-free transaction to Alcoa shareholders for U.S. federal income tax purposes. In connection with the distribution, Alcoa will change its name to Arconic Inc. and its ticker symbol on the NYSE to “ARNC” on Nov 1. Alcoa Corporation will trade as an independent company on the NYSE under the ticker symbol “AA”.

On Jun 29, 2016, Alcoa Upstream Corporation (to be renamed Alcoa Corporation prior to separation) filed an initial registration statement on Form 10 with the U.S. Securities and Exchange Commission (SEC) for the planned separation. The filing – an important milestone for the business split – includes preliminary detailed information (including business and strategy and historical financial information) about Alcoa Corporation as a standalone company. It is subject to change before the completion of the split.

Margins

According to the company, gross profit was $996 million in 3Q16, down from $$1,014 million in 3Q15.

SG&A and other expenses in 3Q16 were $275 million, up 5.4% y/y. Research and Development (R&D) expenses in 3Q16 were $38 million, down 44.7% y/y.

Outlook

Management did not provide any guidance for margins.

Earnings per Share

Alcoa saw higher profits on a reported basis in 3Q16 on gains from its aggressive productivity actions, but its adjusted earnings and sales fell short of expectations.

The company logged profits, as reported, of $166 million or $0.33 per share in 3Q16, a nearly four-fold rise from $44 million or $0.06 per share in the year-ago quarter. Productivity gains continued to offset

headwinds from lower metal prices. The company recorded productivity gains of $246 million (post-tax) across all segments in the quarter.

Barring one-time items, earnings came in at $0.32 per share in 3Q16, up from $0.21 per share a year ago.

Outlook

Management did not provide any earnings per share guidance.

|Analyst |Madhu Goyal |

|Copy Editor |Tuhin Roy |

|Content Editor |Anindya Barman |

|Lead Analyst |Anindya Barman |

|QCA |Anindya Barman |

|No. of brokers reported/total |11/11 |

|brokers | |

|Reason for Update |Earnings Update |

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Oct 18, 2016

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