Inside Wall Street: Buy Alcoa to bet on economy

Improving global demand for aluminum bodes well for the battered stock.

By Gene Marcial Jan 12, 2012 1:22PM
Image: Stock trader with phone (© Comstock/SuperStock)Watch Alcoa. It may be signaling re-invigorated economic times ahead.

 

Since April of last year, shares of Alcoa (AA), one of the world's largest manufacturers of aluminum and alumina, have been in a downspin. They tumbled from more than $18 a share in April, 2011, to a low of $8.52 on Dec. 28. But the stock's recent jump to $9.80 -- even after reporting a fourth quarter loss on Jan. 10 of 3 cents a share -- indicates to some pros that the negative sentiment towards Alcoa may be abating.

 

More than that, some analysts say it is signaling that the wobbly economic recovery may be finally gaining real traction. Some big investors have been buying shares, confident that the stock is headed much higher over the next 12 months.

 

Predictably, however, Wall Street continues to harbor antagonism towards the stock because of its sharp fall during the onset of the recession. Many analysts who follow Alcoa remain unconvinced that the stock is over the hump, especially with its posting of an unexpected fourth-quarter earnings loss, no matter how modest. Part of the reason for the Street's wariness is the industry has long been plagued by bloated inventory levels and high production costs.

 

But with Alcoa taking steps to cut production costs and, at the same time, increasing output from its newer low-cost facilities, the bulls are encouraged, and convinced, that the company is forthrightly addressing the industry's woes.

 

"Alcoa's recent moves on cutting costs are positive steps toward raising smelting margins near term," says Paul Massoud, base metals analyst at investment firm Stifel Nicolaus. He rates Alcoa as a buy. Alcoa's downstream operations has the "most upside potential," he notes. As an example, the aerospace industry's demand for aluminum is projected to increase 10%-12% this year, which should lead to "continued robust margins for Alcoa's engineered products and solutions" unit, says Massoud.   

 

A significant signal from Alcoa is that the company predicts an increase in global demand for aluminum, which would precipitate, some analysts say, a shortage in supply of some 600,000 metric tons in 2012. Alcoa's sales in the fourth quarter had climbed 6%. The source of demand growth will come primarily from the aerospace, auto, and commercial transportation industries whose revenues are projected by Alcoa to increase around 20% in 2012.

 

Massoud sees Alcoa's stock rising to $11 a share over the next 12 months, based on his 2012 earnings forecast of 70 cents a share on estimated revenues of $24.52 billion, up from 2011's 66 cents, on revenues of $24.95 billion. The 2012 estimate is off from Massoud's earlier estimate of 75 cents, reflecting the lower volume in Alcoa's alumina unit which, he says, should be somewhat  offset by the lower production costs in the primary metals group. Alcoa recently announced the shutdown of 240,000 tons of production from some of its high-cost facilities in Europe.

   

Analyst Lee J. Larkin of Standard & Poor's sees Alcoa as a "special turnaround" stock and vehicle to benefit from the unexpected rise in demand for aluminum." So he continues to recommend it as a buy. Larkin says the company's cost-cutting measures and increased production at its lower-cost plants should result in a lower breakeven point and lead to "greater profitability and less volatility in earnings." He emphasizes that the jump in global demand for aluminum and alumina, combined with projected price increases as a result of the increased volume, bode well for Alcoa's long-term goals.

 

Although Larkin has trimmed his earnings estimate for 2012 to 82 cents a share from 87 cents, he has  retained his 12-month price target for the stock at $13 a share. Even at that projected price, he notes, the stock would be trading at the low end of its historical range.

 

Investors scouting for an a battered, stock that is bound to benefit from a steadily resuscitating global economy, Alcoa fits the bill. Indeed, with most of the Street analysts still skeptical about Alcoa's potential turnaround, the stock continues to be attractively priced.       

 

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: AA
2Comments
Jan 12, 2012 8:48PM
avatar

Buying Alcoa is a Bet on the Economy

 

So, in other words, DON'T buy Alcoa because our economy is toast.

This article is just another fine example of MSN's sell-side shill propaganda.  CNBC with a different name, but the same goal..."buy, buy, buy".  Want the truth?...go to Zero Hedge, read, be enlightened.

 

 

 

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