Is Alcoa a Bargain Here?

With shares of Alcoa Inc. (NYSE:AA) trading at around $8.32, is AA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The Alcoa situation can be summed up easily: a quality company in a weak industry.

Alcoa reported last night. Expectations were for EPS of $0.08 on revenue of $5.91 billion. EPS came in at $0.13 on $5.80 billion in revenue. These mixed results had the stock dancing between red and green lights after hours yesterday. Today, the stock is down slightly, but this has been a ho-hum opening earnings report. Perhaps this is a positive considering many investors expected the report to be much worse. As hinted at in the first sentence, Alcoa is a quality company. Management has truly done the best it can to make the most of a bad situation. This should mean that the stock would perform extremely well once the industry turns for the better, but if the industry hasn’t turned for the better over the past several years, then it’s not likely to turn for the better within the next few years. The global economy is facing too many headwinds.

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For a moment, let’s forget about all the negatives and take a look at several positives for Alcoa:

  • All segments achieved a solid performance in Q1
  • Strong liquidity has been maintained
  • Forecast of 7 percent aluminum demand growth in 2013 reaffirmed
  • Record-low first quarter working capital
  • Continued productivity improvements across all businesses
  • Higher volumes and record profits in downstream business
  • Impressive upstream performance despite weak metal prices

The biggest negatives include weak stock performance in a bull market, higher pension, planned maintenance cost, weak metal prices, and an unpredictable global economy.

The chart below compares fundamentals for Alcoa, Aluminum Corporation of China Limited (NYSE:ACH), and Rio Tinto plc (NYSE:RIO). These three companies differ in size. Alcoa has a market cap of $8.95 billion, Aluminum Corporation of China has a market cap of $5.06 billion, and Rio Tinto has a market cap of $88.74 billion.

AA

ACH

RIO

Trailing   P/E

47.01

N/A

N/A

Forward   P/E

9.79

N/A

6.24

Profit   Margin

0.81%

-5.51%

-5.87%

ROE

0.96%

-15.45%

-5.11%

Operating   Cash Flow

$1.50 Billion

$179.00 Million

 $9.37 Billion

Dividend   Yield

1.50%

N/A

4.10%

Short   Position

6.50%

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Alcoa has improved, and it’s stronger than the industry average of 0.60.

Debt-To-Equity

Cash

Long-Term Debt

AA

0.35

$1.60 Billion

$8.83 Billion

ACH

1.94

$1.45 Billion

$16.67 Billion

RIO

0.46

$7.32 Million

$26.74 Billion

 

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T = Technicals Are Weak

Alcoa has underperformed the market for several years. Unfortunately, there aren’t enough positive signs to indicate a change in this trend.

1 Month

Year-To-Date

1 Year

3 Year

AA

-2.79%

-3.25%

-11.61%

-39.92%

ACH

-12.28%

-21.41%

-19.66%

-67.27%

RIO

-6.98%

-16.63%

-9.33%

-15.57%

 

At $8.37, Alcoa is trading below all its averages.

50-Day   SMA

8.66

100-Day   SMA

8.66

200-Day   SMA

8.70

 

E = Earnings Have Been Subpar           

Earnings haven’t been terrible. If this wasn’t a well-run operation, this situation would be a lot worse. However, industry trends are often the most important factor, and there is simply no way around that. Revenue had been improving for two years until a setback in 2012. Alcoa is likely to show similar results in the future. It will do its best to maintain its current status. In other words, it will make sure it survives, but it’s not likely to thrive anytime soon.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

26.90

18.44

21.01

24.95

23.70

Diluted   EPS ($)

-0.10

-1.23

0.24

0.55

0.18

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and an increase in earnings. It should be noted that there were fewer days of operation in Q1 compared to Q4, which was a partial cause for the revenue decline. In comparison to Q1 2012, the revenue decline was partially attributed to lower London Metal Exchange aluminum prices as well as the impact of curtailments in Alcoa’s European primary metals production.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

6.01

5.96

5.83

5.90

5.80

Diluted   EPS ($)

0.09

0.00

-0.13

0.22

0.13

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Lower aluminum prices and several economic headwinds don’t favor the industry. There is simply a lack of catalysts for the industry at the moment.

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Conclusion

Shrinking revenue, lower aluminum prices, and an unpredictable global economy are the biggest concerns. History tends to repeat itself, and Alcoa has performed poorly in a bull market. There is no reason to think this trend will change. The 1.50 percent yield is nice, but there are better situations to consider, especially in different industries.

Alcoa only earns a neutral WAIT AND SEE rating because of its quality management.

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