Alcoa is shining brighter

Shares of the aluminum king remain undervalued by at least 40%.

By TheStreet Staff Jan 9, 2013 1:31PM

 Car tire copyright Sarah M Golonka, Brand X, Getty ImagesBy Richard Saintvthestreet logoilus  


Alcoa's (AA) royalty status on the stock market often comes into question. In my opinion, it's deserved.


Aside from being the U.S.'s largest producer of aluminum, the blue-chip Dow ($INDU) component also serves as a gauge for what might be expected each earnings season when it reports. 

If Alcoa's fourth-quarter report is any indication, investors would be wise to get their buy orders in early for companies that will report next.


On Tuesday, the aluminum giant reported income of $242 million, or 21 cents per share. This compares favorably to a loss of $193 million in the fourth quarter of 2011. 

Revenue arrived at $5.9 billion. Although this represents a 2% decline year over year, revenue advanced 1% sequentially. This was attributed to a 5% improvement in aluminum prices, which has hurt the entire industry all year.


For the full fiscal year, Alcoa posted net income of $191 million, or 18 cents per share. While this figure is significantly lower than the $614 million for fiscal-year 2011, aluminum prices have also fallen 12% year over year, affecting the market by $1 billion.


All year Alcoa has had to do more with less. Despite these obstacles, the company still managed to meet its profit and capital sustainability goals, a streak that now reached four years in a row.


For the performance, Klaus Kleinfeld, Alcoa's chairman and chief executive, offered this:


Alcoa hit record profitability in our mid- and downstream businesses, and continued to drive efficiency in our upstream businesses in the fourth quarter, all while cutting debt and maintaining our cash position. We overcame volatile metal prices and global economic instability to deliver on our targets for the fourth year in a row. We enter 2013 in a strong position to maximize profitable growth.


It's hard to disagree. What's more, the company's net debt position ($1.9 billion) is at its lowest in seven years. This is arguably management's best performance by far, especially considering the recent poor economics of the industry. And things are just beginning to get better.


Guidance for the year

Alcoa said in the third quarter that it saw aluminum demand growth of 6% for 2013. However, during the fourth-quarter conference call, management upgraded the outlook by 1% to 7%. This is important because the company's original forecast that aluminum demand would double by 2020 requires current demand of at least 6.5%. This is since 2010 and 2011 produced aggregate growth of 23%.


The company also sees upwards of 10% growth in the aerospace industry and 4% and 7% growth in automotive and commercial transportation respectively. This supports previous statements made by management about companies including Ford Motor (F) and Boeing (BA) that have started to migrate towards using aluminum in their vehicles and jets. However, it doesn't end there.


Alcoa also projects a 3% improved performance in its packaging business, while building/construction and industrial gas turbine are both projected to grow at 5%. Likewise, there are also plenty of growth opportunities in areas such as appliances, where names including General Electric (GE) might become a significant consumer of aluminum.

Bottom line

Overall, it was an excellent quarter. Management deserves credit for continuing to figure out ways to develop productivity gains, which helped offset prolonged cost concerns. More importantly, management remains committed towards returning value to shareholders.


Based on its growth outlook, the stock looks incredibly cheap at $9 and remains undervalued by at least 40% -- $12 to $15 per share seems the more reasonable target based on the potential aggregate effect of these improvements.


At the time of publication, the author held no position in any of the stocks mentioned.



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