Alcoa's strong third quarter was largely driven by material margin expansion in its primary metals business. Although management's efforts to reposition the company as a "lightweight multimaterial innovation powerhouse" with significant leverage to the automotive and aerospace end markets has received a great deal of attention in recent months, it was the commodity businesses that generated the vast majority of incremental operating income in the quarter.
The primary metals business delivered a 13.1% aftertax operating margin in the third quarter, up from 5.8% in the previous quarter and only 0.5% in the same period last year. This was driven by two key factors. First, Alcoa has made significant progress moving down the industry cost curve for aluminum smelting by closing high-cost facilities and ramping up its Ma'aden joint venture in Saudi Arabia, which is expected to be the lowest-cost production facility in the world. Its improved cost structure was complemented by increased London Metal Exchange aluminum spot prices, which briefly peaked above $2,100 per tonne during the quarter, and higher regional premiums. As a result, the primary metals business generated $612 of EBITDA per ton, its best result since the second quarter of 2008.
Although the engineered products and solutions business also reported a noteworthy quarter, producing a record aftertax operating margin of 14.0%, Alcoa's improvement was broad-based. All four reporting segments generated higher operating income on a sequential basis, and companywide operating income increased 48% relative to the previous quarter.
In light of Alcoa's encouraging results, we've increased our near-term forecasts for the profitability of the primary metals, global rolled products, and engineered products and solutions businesses. As a result of these changes and the time value of money, we've increased our fair value estimate to $19 per share. Our no-moat and stable moat trend ratings are intact.
