Is Alcoa’s Stock a Good Buy Right Now?

With shares of Alcoa (NYSE:AA) trading at around $8.74, 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

Alcoa and Ma’aden have formed a joint venture, and the first of 720 smelting furnaces has been commissioned. With this joint venture, the aluminum industry is born in Saudi Arabia. For Alcoa, this will be lowest-cost producer project in its history. It’s a win/win for both parties. In other news, Alcoa recently signed a 10-year deal with Bonneville Power Administration for its aluminum smelter.

As you can see, Alcoa never sleeps. While the stock had a tremendous run for decades, it’s one of the few that hasn’t recovered from the 2008 financial crisis. Demand for aluminum has been poor, which has recently had a lot to do with China’s softening economy. Aluminum pricing has also dropped 17 percent YoY. On the other hand, the long-term outlook for aluminum is good.

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Alcoa reported a disappointing Q3, but much of this had to do with an environmental remediation and legal settlement. We will get to the Q3 numbers soon. The good news is that Alcoa has reported higher utilization rates, lower scrap rates, and usage reductions.

Now let’s take a look at some important numbers to help determine where the stock might be headed.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Alcoa is normal. It’s much stronger than the debt-to-equity ratio for Aluminum Corporation of China (NYSE:ACH), yet it’s not quite as strong as the debt-to-equity ratio for Kaiser Aluminum (NASDAQ:KALU). Alcoa’s balance sheet is in negative territory and could be improved.

Debt-To-Equity

Cash

Long-Term Debt

AA

.57

$1.43 Billion

$9.52 Billion

ACH

1.50

$1.81 Billion

$6.36 Billion

KALU

.37

$335.50 Million

$378.40 Million

 

T = Technicals on the Stock Chart Are Weak

Alcoa has performed poorly over the past three years. The past year has brought better results, but the stock is still in negative territory for that timeframe.

1 Month

Year-To-Date

1 Year

3 Year

AA

2.43%

1.16%

-6.41%

-39.02%

ACH

.81%

35.20%

36.90%

61.97%

KALU

6.29%

4.81%

.27%

-60.07%

 

At 8.64, Alcoa is currently trading close to all its averages.

50-Day SMA

8.63

100-Day SMA

8.69

200-Day SMA

8.99

 

E = Earnings and Revenue Are Sporadic

Annual earnings and revenue have been unsteady. The decline in revenue from 2007 to 2009 was cause for concern, but the past two years have shown better results.   

2007

2008

2009

2010

2011

Revenue ($)in billions

29.28

26.90

18.44

21.01

24.95

Diluted EPS ($)

2.94

-.10

-1.23

.24

.55

 

Quarterly earnings and revenue have also been mixed. Q3 YoY saw declines in both revenue and earnings, but this was likely just a bump in the road.  

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

6.42

5.99

6.01

5.96

5.83

Diluted EPS ($)

.15

-.15

.09

.00

-.13

 

T = Trends Support the Industry

China might have slowed, but the Middle East brings a great opportunity when it comes to aluminum. This is especially true for automotive products. Alcoa will be at the forefront of this movement, and they will likely reap some impressive rewards.

Conclusion

If you’re looking at the big picture, then you can own Alcoa at a discount right now. However, this is only the case if you’re willing to wait years, not months. With the approaching fiscal cliff and a weak global economy, this isn’t the best time to own a company like Alcoa. The good news is that this is a company that has been through tough times several times over. It’s also a company that isn’t done growing despite its age. Alcoa is currently laying the groundwork for the future when the economy does recover naturally. That could be five to ten years from now, but Alcoa will remain patient and be rewarded for its foresight.

While Alcoa is a great long-term play, there is still room for downside in the near future. Therefore, Alcoa is a WAIT AND SEE at the moment.

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