Based in Pittsburgh, Pennsylvania, Alcoa Inc. (NYSE:AA) is the third-largest producer of aluminum in the world. The company is involved in exploration, mining, refining and smelting of primary aluminum and alumina. The company is also involved in fabricating and recycling aluminum. Their aluminum based activities, products and services produce 75% of the company's revenue. The company also produces non-aluminum based products such as industrial and aerospace fasteners, and precision castings. Products by Alcoa Inc. are used in a variety of industries such as transportation, defense, oil and gas, aircrafts and packaging.
The total revenue generated by Alcoa Inc. in 2012 was 23.7 billion dollars. The company operates in 31 countries and its total current assets are worth over 40 billion dollars. The company was established in 1888, and has grown to be a global giant in the aluminum industry over the last 125 years.
The company's stock is currently worth $9.06 per share (Feb 19, 2013), and the general consensus in the market is to buy AA stocks. The company has been paying dividends consistently, but the recent amount ($0.03) is the lowest in the last decade. The market trends are currently bearish when it comes to Alcoa Inc. and some investors might be confused whether to buy, sell or hold AA stocks. Let us analyze the company and weigh the pros and cons of adding this stock to your portfolio.
Alcoa Inc. operates in 31 countries in the world, and has a diverse portfolio. Its aluminum, alumina and non-aluminum based products cater to a variety of markets such as the aerospace industry, alumina industry, aluminum Ingot industry, the automotive industry, commercial transportation, consumer electronics, defense, electric industry, the energy sector, home and commercial building supplies and packaging. The company has operations in the UK, USA, Russia, Australia, Ghana, and Iceland.
What Does it Mean
From the overview, the company seems like a great investment. It is a multi-billion dollar juggernaut consistently generating billions of dollars worth of revenue and has global outreach. The portfolio is diverse within the aluminum industry, but not so much outside of it.
We have mentioned that 3/4 of the company's revenue is generated by aluminum and alumina products, so any changes in this industry can have a deep influence on the company's value. However, the aluminum industry is one of the major industries in the world, with the U.S. alone producing over 40 billion dollars worth of aluminum and alumina based products.
If the last century is indicative of anything, the aluminum industry will not face a major crisis anytime soon, so AA is a safe investment in this regard. However, considering the relatively higher priced stocks of competitors such as Aluminum Corp. of China Limited (NYSE:ACH) and Kaiser Aluminum Corp. (NASDAQ:KALU), Alcoa Inc. faces stiff competition and investors have more than one choice if they are interested in the aluminum industry.
Based on the industry and the diversity of its portfolio, Alcoa's major strengths are its global outreach and its innovative products. At this point, there is room for further diversification in the company's portfolio when it comes to aluminum and non-aluminum based products. Potential investors would be more inclined to buy AA's stock if the product range were expanded.
The company's total assets have grown steadily over the last five years, from around 38 billion to over 40 billion dollars. The company's total debt has decreased from over 10 billion dollars to just over 9 billion dollars. These numbers do not indicate rapid growth, but they do indicate consistency and steady growth.
AA's Liquidity Ratios
Alcoa Inc. has a quick ratio of 0.61 based on the numbers of 2012, while its current ratio is 1.3. We all know that liquidity ratios indicate a company's ability to get rid of its liabilities by using its assets and cash. A lower than one value indicates that the company's liabilities outweigh its assets. In the case of Alcoa Inc., the quick ratio is less than one, which means that the company has more liabilities than its short-term marketable investments, receivables and cash combined.
However, the company's current ratio is greater than one, which means the company has total assets greater than its total liabilities. Being the third-largest aluminum producer in the world, Alcoa Inc. is expected to have manageable liabilities, and the quick ratio of less than 1 is enough to put doubts in the minds of potential investors, but we should also examine other financial indicators.
The current P/E ratio of Alcoa's Inc. is 57.77 and the EPS is 0.16 as mentioned on Google Finance. The P/E ratio for 2012 is mentioned as 38.83 on NASDAQ, and the forecasted 12 month PEG ratio is 1.67. The P/E ratio on NYTimes is 59.4 and the EPS is 0.16. The P/E ratio and EPS on Yahoo Finance are 51.19 and 0.18 respectively. The P/E ratio of Alcoa Inc. on Forbes is 50.3.
As can be seen, the P/E ratios on these websites are different due to the different data sources being used by these companies. In general, the P/E ratio for Alcoa Inc. is greater than 50, and future growth can be expected in the company's stock. The P/E ratio from the start of this year has stayed around the late 40s and early 50s mark consistently, and no dramatic changes have been observed this quarter so far.
If we look at the EPS and dividends over the past five years, a major slump in the year 2009 can be observed. The EPS was highest in 2011 (over 0.5 at one point), and was comparatively low in 2012. These numbers indicate mixed trends, and cannot be used in isolation to form an opinion about investing in the company. The company's estimated PEG ratio according to yahoo finance and several other sources is 2.34, and analysts are currently divided in their opinions about selling, buying or holding.
To Buy, Sell, or Hold
Currently, some analysts are in favor of buying AA, some are cautious, and the market trends are bearish, causing some investors to sell the company stock. The consensus recommendations on NASDAQ, NYSE, Yahoo Finance, Google Finance, and Forbes are slightly inclined toward buying, but these recommendations are not strongly in favor of buying (meaning there are a large number of votes for selling as well).
The following factors are going in favor of AA:
- The company spent 759 million dollars in cash on investment activities.
- Recently, Citic Group announced a 468 million dollar investment in Alumina Ltd. The company has a joint venture with Alcoa, and that caused the stocks to gain 4.3% value. Although the stock value seems to be returning to its original position after the minor boost, the investment is a positive sign.
- The company's total assets have slowly but steadily grown over the last five years.
- The company's annual revenue has been consistent.
- The company has paid dividends consistently, although the amount has decreased.
- The company is a global leader in the aluminum industry, and current trends indicate that it would maintain its market position worldwide.
The things going against Alcoa Inc. are:
- The company's operational costs are high, the operating expenses are over 23 billion dollars. Compared with the competitors, this does not put AA at an advantage.
- Alcoa inc. does not hold a distinct pricing advantage over its competitors.
- The stock has fluctuated a lot over the last few weeks.
When we weigh the good against the bad, the decision about Alcoa Inc. becomes even more complex. It is not one of those stocks where you can simply suggest buying, holding, or selling, based on one or two factors. If market trends are any indication, the stock will go up and down in the next few weeks, depending on the news we receive about the company. If you are a potential investor looking for a short-term investment, Alcoa Inc. presents high risks with not-so-great rewards, so we do not recommend buying these shares for short-selling purposes.
If you are in possession of large quantities of AA stocks, we recommend holding onto your shares. Within the last few weeks, the price has had a few dramatic swings, and tomorrow is unpredictable. It is better to hold onto the shares and let the prices stabilize later into the quarter, and at that time you can make a selling or buying decision.
If you are looking to make a long-term investment, KALU stocks present a very attractive opportunity. However, with AA, you have hundreds of years of consistent performance, and the knowledge that the company is investing, expanding, and steadily growing. I wouldn't invest my life savings into AA, but I would purchase a reasonable quantity of shares while the prices are low. For long-term investors, this is the time to buy.
In conclusion, Alcoa Inc. is a reliable company, and is suitable for long-term investors. We do not recommend selling AA stocks for now, and discourage short-term investors from buying Alcoa stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was written by an analyst at Catalyst Investments.