Essay Darrow Aluminum

Submitted By bmt1922
Words: 1406
Pages: 6

Size-Up and Key Factors
Macroeconomic and Industry Conditions
• The bond yield curve supports the belief that the US economy is expected to grow in the near term (yields are increasing over time).
• The aluminum industry is mature in North America, although growth is not expected to decline.
• The aluminum industry does not appear to have significant barriers to entry.
• Aluminum products appear to be commoditized, ie there is no easy way of differentiating based on product attributes and hence companies in this industry likely have to compete on price.
• Export markets, specifically emerging markets, represent a source of growing demand for aluminum products. This is an attractive opportunity for firms in the industry, representing both a potential source of revenue growth as well as diversification and risk mitigation. However, this is not entirely risk-free, as it would expose firms to more complicated operational challenges as well as currency risk. There are also considerations surrounding ease of entry and domestic competition within emerging markets – Darrow LPC has no significant presence in emerging markets and may not be able to price competitively with domestic producers of similar products on account of its exclusively (higher-cost – unionized workforce etc.) North American operations.
• Borrowing costs for firms are rising. The prime rate is on the rise, lending options for smaller companies are limited – large banks have no interest in financing small-scale deals - and the required rate of return from venture capital is fairly high at ~25% and would entail the imposition of covenants.
• Aluminum demand is still largely driven by demand within the United States and other Western countries, but growth is expected in developing economies. Continued demand for Aluminum LPC products in the United States, expected to be at around 2%, combined with even greater emerging market demand, indicate that demand for LPC products will continue to grow in the near-term.
• Aluminum foil packaging products, the LPC Division’s primary product in terms of revenues at present, is considered a major source of growth and profit potential.
• Secondary aluminum markets are on the rise due to lower cost, convenience and growing customer acceptance. This could represent a significant threat to operating margins should the growth of secondary markets place downward pressure on the price for aluminum products.
• The price of aluminum is volatile, fluctuating between $1100 and $1325 per tonne in just a two-year span. Further, the price of aluminum is expected to rise to $1600 by 1996. This could raise input costs significantly, hurting margins and creating the potential of increased competition from substitute products manufactured from a different material should the price of aluminum make other substitutes more attractive or less costly.
Internal Considerations
• Darrow LPC is largely reliant on supplying foil to the tobacco industry, which accounts for 67% of their sales. Moreover its contract with Feldman, its largest customer, does not specify a minimum volume to be supplied. This is a significant risk as the tobacco industry would generally be considered an industry in decline in the United States at this time.
• Darrow’s aluminum and steel cable wrap products, although accounting for a much smaller percentage of revenue than foil packaging at this time, are experiencing rapid growth.
• Insulation wrap demand would be subject to cyclicality due to its association with residential construction. This isn’t a concern in the short-term given anticipated economic growth in the US and abroad, but could face sharp decline should that not prove to be the case.
• Darrow LPC has a young and capable management team and experienced executives in Dillon and Bennet.
• Darrow LPC has a unionized workforce. Although labour relations are generally considered good, this suggests a higher cost structure than could be achieved by…