Forget the headlines: Buy Alcoa now

The aluminum giant's earnings fell short, but the stock has a lot of other things going for it in the long term. With video reaction to Alcoa's third-quarter financial results.

By InvestorPlace Oct 12, 2011 9:15AM
By Jeff Reeves,

Alcoa (AA) disappointed investors big-time Tuesday with earnings missing forecasts by about 32%. But look past the headlines and consider the merits of buying AA stock right now, especially if you are the buy-and-hold type.

Alcoa stock opened down as much as 3% in early trading Wednesday after the aluminum company reported profits of $172 million, or 15 cents a share, for the third quarter. That was well short of the 22 cents per share forecast by Wall Street investment analysts. But there are signs of life at Alcoa -- and reasons to expect the stock is at or near the bottom.


Post continues below:

The company posted sales of $6.42 billion, which topped forecasts of $6.24 billion. Alcoa profits were also up significantly from $61 million, or 6 cents per share, a year ago. The company also affirmed a growth forecast of 12% for fiscal 2011, as well as reasserting claims that aluminum demand will double by 2020.

Encouraging signs, to be sure. What's more, exec Klaus Kleinfeld summed up Alcoa's bulletproof balance sheet very succinctly in the earnings conference call: "Alcoa is a confident company in a nervous world. We are well prepared for whatever lies ahead, with more cash on hand, lower debt and continued focus on profitable growth."

Kleinfeld is right. The company has $1.2 billion in cash on its balance sheet. It has over $9 billion in total debt but also $41 billion in assets.

The biggest headwind to Alcoa, of course, is that demand is weak and aluminum prices are soft. Aluminum prices fell about 12% in the third quarter, continuing a downward spiral that has weighed on AA stock and hurt margins for some time. Alcoa is off a gut-wrenching 33% year to date in 2011 and about 75% below the 2008 peak for AA stock prices, currently around $10 from about $43 three years ago.

But there are many reasons to think Alcoa is at or near a bottom and has adjusted to the tough market environment. The company has been profitable since Q1 2010. The company has seen seven straight quarters of significant year-over-year growth in EPS and six consecutive quarters of big top-line revenue growth over the previous year. Throw in decent numbers this quarter, except for the profits, and you have some fairly good fundamentals behind Alcoa.

The valuation numbers scream that Alcoa is a bargain buy. The forward P/E of AA stock is a mere 8.5. The five-year price/earnings-to-growth ratio is just 0.25. Price-to-book is 0.69. This stock is a heck of a deal by almost any measure.

Throw in the fact that aluminum prices and demand eventually will recover, and you have a good long-term buy here.

Of course, that demand recovery could be two years or three years or longer. And we all know that Wall Street is far from rational in the short term and will sell off good stocks at a moment's notice. So there might indeed be more troubles in store for Alcoa in the near future.

But if you are looking for a long-term investment to buy and hold, you might not find many better bargains than Alcoa after the earnings overreaction.

Jeff Reevesis editor of As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

Related Articles

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120 rated 1
268 rated 2
439 rated 3
709 rated 4
641 rated 5
609 rated 6
640 rated 7
516 rated 8
272 rated 9
152 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.