Alcoa's Price Drop Is an Opportunity

The current economic crisis is creating unique buying opportunities for some blue chip companies trading at historic price lows.

Alcoa (AA), which is the largest aluminum producer in the US, is currently trading at below $7.00 per share. Alcoa’s stock has not been this low since the early 90s. Alcoa has a market cap of about 6 billion dollars. Alcoa currently carries a P/E ratio of 3 which is well below the industry average of 6.

Commodities stocks have been hit particularly hard this year due to the deflationary environment. Deflation has led to a decline in commodity prices. Aluminum prices have fallen roughly 50 percent from their highs of the summer. Combine this with the weakening demand for aluminum due to the global recession and you can see why Alcoa’s stock has dropped significantly.

So why do I like this stock? I think that all of the negative news has already been priced into Alcoa’s stock. Even if the earnings decline by 50% going forward, the earnings multiple would still be slightly lower than the industry average. Alcoa has taken the necessary steps to survive the global recession. Alcoa has already cut aluminum production by 15% and has frozen its spending on capital projects. The company restructured its long term debt obligations to improve liquidity. Alcoa’s debt to capital ratio is just above .36 which means the company is capable of meeting its financial obligations. Alcoa’s stock is currently paying out an attractive 8% yield in dividends .

The stock does still carry significant risk because of the current volatile market conditions. But at these prices, I am a buyer of Alcoa stock.

Disclosure: Author holds a long position in AA

Comments

[greyma:]

It is difficult to like this stock after buying in the 20's. Hopefully management will be appropriately treated. However management always seem to survive and litigation is almost impossible. Why are we so stupid.

2008 Nov 23 01:01 PM

[Gumby:]

Everyone knows that!

2008 Nov 24 12:56 AM

[greyma:]

Why not contribute something helpful

On Nov 24 12:56 AM Gumby wrote:

> Everyone knows that!

2008 Dec 05 12:21 AM

[Bluechiplove:]

Uh, like you did? Get back on the waaambulance!


On Dec 05 12:21 AM User 274323 wrote:

>
> Why not contribute something helpful
>
> On Nov 24 12:56 AM Gumby wrote:

2008 Dec 07 04:38 PM

[Lockstep In...:]

Good call! It looks like you nailed the bottom for this down cycle.

Jan 04 01:37 AM

[Mark Riddix:]

Thanks.

Jan 05 01:48 AM

[PhilUSAFRet:]

Think it will get anywhere near 6 again?

Jan 07 12:41 PM

[Mark Riddix:]

I don't know if it will drop to 6 again. I do think that the stock could easily see the single digits again. If it hits 8 I would look to buy it.

Jan 09 01:24 AM