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Alcoa – Respectable Buy on a Return to Profitability

alcoa

Alcoa (AA) , a world leader in aluminum,  celebrated is 125th anniversary in 2013 with a downer:  a 2.8 percent drop in revenue and losses of $2.43 per share.  The consensus on Wall Street is that the company will return to profitability in 2014, but the question is: is the stock priced right?  From my perspective, this venerable stock is a decent, if not thrilling BUY. Alcoa Inc. produces and manages primary aluminum, fabricated aluminum, and alumina (aluminum oxide, which is smelted into aluminum). The company operates in four segments: Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. The Alumina segment is engaged in mining of bauxite, which is then refined into alumina. The Primary Metals segment produces aluminum. The Global Rolled Products segment produces and sells aluminum plate, sheet, and foil. The Engineered Products and Solutions segment produces and sells titanium, aluminum, and super alloy investment castings; fasteners; aluminum wheels; integrated aluminum structural systems; architectural extrusions; and forgings and hard alloy extrusions. Its products are used in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. Headquartered in New York City, Alcoa is a truly global company, with major operations in the United States, Australia, Spain, Brazil, France, the Russian Federation, Hungary, the Netherlands, Norway, the United Kingdom, China, Germany, and Italy. One of the key driving factors regarding Alcoa is the price of aluminum, which is tied to multiple economic crosscurrents affecting supply and demand. So, serious investors should do their due diligence in this area. If you are considering investment in Alcoa, you are banking on one primary assumption: that the world will continue to use aluminum. Most analysts in the arena not only believe the answer is affirmative, but agree with Erwin Mayr, Novelis senior vice president and president of its European operations, that aluminum usage will grow. Indeed, stock analysts looking out five years on Alcoa see annualized earnings growth at a solid 18.5%. At a stock price of $13.53, on FY 2013 earnings loss of $2.43 the stock presently trades at an infinite PE, and 21 times the consensus 2015 estimate of 73 cents. At first glance, that makes Alcoa appear to be overvalued.  Dig a little deeper, though, and look at its  5-year PEG (Price to Earnings Growth Rate) of 0.71, and the numbers say “long-term value play.” We always want to look at financials, though. The company carries $667 million in cash and $7.8 billion in debt. Trailing 12-month cash flow was $1.1 billion, so the debt service is no problem. The company also sufficient free cash flow  to pay its 0.9% dividend. So Alcoa appears to be on solid footing financially. Conclusion Alcoa is no barn-burner, but as the world leader in aluminum, it’s still positioned to benefit from further global economic growth. Its earnings prospects aren’t yet fully baked into the stock price, so for conservative investors looking for modest but reliable dividends, Alcoa is a respectable buy.

About Lawrence Meyers lawrence meyers Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]

 

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    Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.

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