Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Alcoa Inc (AA), Allegheny Technologies Incorporated (ATI): Low Return Businesses

If you ask investors, most would say that growth is a good thing; growth adds value. Chief Executive Officers and board members largely believe that all growth is good as well.

Alcoa Inc (NYSE:AA)Unfortunately for shareholders, such a narrow view on the value-creating ability of growth can destroy shareholder value, especially when the growth comes from a business that has no competitive advantage. Without a competitive advantage, it is nearly impossible to re-invest cash at a rate that exceeds one’s cost of capital. Companies that cannot re-invest cash at a high rate of return should give all excess cash flow back to shareholders. Unfortunately, this rarely happens in practice — especially in capital-intensive industries.

Value destroyers

Alcoa Inc (NYSE:AA) is a good example of how growth can destroy value. Alcoa Inc (NYSE:AA) operates in a mature industry that faces significant competition, especially from abroad. However, management continues to grow its asset base by building new refineries and re-investing in old ones in an attempt to boost earnings. The company has benefited from a global recovery in alumina demand and is growing at an above-average rate in emerging markets, but it is still anything but a great business.

Allegheny Technologies Incorporated (NYSE:ATI) operates in a subindustry similar to that of Alcoa’s. The company has benefited from the boom in hydraulic fracturing techniques used in unconventional oil & gas plays. Allegheny Technologies Incorporated (NYSE:ATI)  recently bought its way into the aerospace industry, where it hopes to grow alongside global air traffic.

Century Aluminum Co (NASDAQ:CENX) is the final player in a capital-intensive industry that is destroying value in its pursuit of growth. The cyclicality of the industry leads to unstable earnings and the ever-present threat of bankruptcy. At the moment, the increase in demand for aluminum has put the company in relatively good standing, but continued investment in the company will only lead to low returns on invested capital.

Low return businesses

Alcoa Inc (NYSE:AA), Allegheny Technologies Incorporated (NYSE:ATI), and Century Aluminum Co (NASDAQ:CENX) are each striving to grow amidst strong competition. Most capital-intensive industries continue to add more and more capacity despite the low returns; it is as though they refuse to accept their fate and push on in the hope of one day their investments will pay off.