Is Now The Time to Buy This Depressed Dow Stock?

Alcoa (NYSE:AA) is blessed, or cursed, with the honor of being the first Dow Jones Industrial Average component to report earnings each quarter.  They kicked off the summer earnings season with a modest beat on drastically lowered estimates and the stock price fell to a new 52 Week Low during the trading week and closed at a share price not seen since the early 1990’s.  Lowered guidance, commodity price jitters, and general palpitations over the state of the global economy all serve as likely culprits.  However, CEO Klaus Kinsfield noted strong demand for aluminum from both the automotive and the aircraft sectors, but not even an announcement of a $1.4 Billion dollar deal with European aircraft manufacturer Airbus could stem the flow of red. The question is whether Alcoa at a near 20 year low is a Buy.  Is there opportunity, or should we all stay away?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

The Airbus announcement serves as potential evidence Alcoa (NYSE:AA) is stuck in a rut and the only catalyst that could propel this stock is solid evidence the European debt crisis is not going to bring the entire global economy to its knees.

H = High Quality Pipeline

You don’t think of a base metals producer like Alcoa as having an ongoing pipeline of new products like a Tech or Pharmaceutical company.  Yet Alcoa invests 1% of its revenues into Research and Development.  In reality Alcoa’s “pipeline” does not consist so much of new products but of new technologies.  They have a technological organization spanning research centers and universities around the world working on improved processes and services, and some new forms of aluminum products as well.  These enhancements and innovations fall off the radar screen of most investors since you can’t rollout a process the way Apple (NASDAQ:AAPL) rolls out a new IPhone or Microsoft (NASDAQ:MSFT) a new operating system.  The Alcoa Technical Center outside of Pittsburgh is the world’s largest light metals research center.  In a world going increasingly green, Alcoa management expects the demand for lighter metals like aluminum to nearly double by 2020.

E = Equity to Debt Ratio is Close to Zero

Here is where Alcoa (NYSE:AA) gets problematic.  Their debt to equity ratio is .69, or 69% which is not good.  In context, their total debt is about $9.5 Billion with cash on hand of only $1.7 Billion.  Their cash position has been badly hurt by metal prices, which are currently approaching two year lows.  However, the company’s cost control efforts may be kicking in as they reported positivefree cash flow of $246 Million, compared to last quarter’s negative $506 Million, an improvement of $752 Million.

A = A Level Management Runs the Company

A Level management is quick to recognize when things beyond their control go against them and take action to control what is within their power to control.  Alcoa (NYSE:AA) has been tossed about by lowered commodity prices and higher input costs from oil prices and other materials.  Rather than hope for the best, Alcoa management has reacted with aggressive cost-cutting measures and restructuring its business segments for greater operational efficiency and enhanced productivity.  So far they appear to be doing the best they can in difficult circumstances.

T = Trends Support the Industry in which the Company Operates

The need for greater fuel efficiency is driving demand for lighter metals and Alcoa is the world’s leading supplier.  Despite current macroeconomic conditions, Alcoa (NYSE:AA) management reiterated its forecast of 7 percent growth in global aluminum demand this year, with eleven percent growth in China.  CEO Klaus Kinsfield said the company is seeing “13 percent to 14 percent growth in aerospace this year, 4 percent to 8 percent growth in automotive, and 2 percent to 3 percent global growth in beverage cans.”

Conclusion

The verdict on Alcoa (NYSE:AA) is wait and see.  The numbers just won’t be there if the company is wrong about demand forecasts and increasing metal prices.  Like many stocks today, Alcoa’s future is in doubt until some kind of certainty regarding global growth emerges.  However, for the riverboat gamblers out there, it is hard to ignore an established Blue Chip company trading at a price nearing twenty year lows.

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