Why Isn't Alcoa Doing Better
It is amazing how Alcoa (AA) gets all the attention it does because it is the first company to give earnings reports every quarter. Being a member of the Dow Jones Industrial Average is a big help I, but the stock continues to lag and seems to be a source of divergence for companies that would be interested in using the metal it manufactures: automotive and construction are two simple examples. Is it really a bellwether for the economy as a whole? Alcoa stock is down almost 4% from the start of the year while the S&P 500 has grown more than 10%. While the company is well below its record high of $48.77 from 2007, )the S&P 500 is pushing on through its 2007 levels. So why is it considered a leading indicator?
Notice the diversity in these figures: Alcoa recently beat market expectations when the company's first quarter numbers came out Monday evening. Its revenue declined close to 3% from a year earlier and this is the fourth consecutive quarter that this is happened. Yet industries that have an interest in aluminum like the aerospace industry are expected to grow at least 9% this year, the automotive industry possibly up to 4%, and building and construction 4% to 5%. Since the beginning of 2011 automotive production has increased steadily. The aerospace industry has grown for 18 straight months- year over year and construction has not slowed down. If these are doing so well, why isn't Alcoa's revenue getting better?
Good Earnings not enough?
The company still has a long way to go until it falls into good graces with investors. It was nice that the company beat earnings and also the whisper number, but it appears investors focused on revenue that has continued to shrink because of expected lower aluminum prices. Net income was $149 million which was far better than the loss it recorded a year ago but it didn't help. If I can put the company in perspective, even though the price is low compared to many other companies its price to earnings is still above 20 while the average company in the S&P 500 is at about 18. This does not make the aluminum manufacturer an appealing investment right now.
With that being said, let me state that I am, and have been, well impressed with Alcoa's management and its ability to perform like it has in such an adverse market. Rival companies like Commercial Metals (CMS) has not performed as well as Alcoa, so even though earnings were good but revenues fell, I still believe the company has a solid management core that will see it through and back into a profitable revenue stream. So even though revenue fell short of estimates I must take my hat off to management to be able to increase quarterly profits for the company and its shareholders.
As management stated, it has forecasted a 7% growth in aluminum this year which would help the company tremendously. For this reason I think it will have better quarters in 2013. Management also stayed focus on its projections, not deviating from them. I would expect as the US economy continues to show signs of life automobile companies like Ford (F) will continue to explore using more aluminum and in the aerospace industry Boeing (BA) will do the same.
If you have not invested in Alcoa yet, but the price looks inviting, then I would do some further research in the expected growth of the economy in China. The reason I say this is Alcoa's management alluded to China being responsible for close to 50% of the company's future growth. It might be time to do further research in Alcoa because if Europe finally builds a foundation and its recession riddled economies improve, Alcoa will also be finding growth coming from that region of the world in 2014 and beyond. For this reason the company could be a good candidate for a growth stock for years to come. But the question an investor needs to ask is: when is a good time to invest in the company?
I believe that the economies of the world will continue to inch their way upward and find some bumps along the way. Alcoa will profit no matter what because of this. Aluminum will continue to widen demand because it is a light strong metal. If an investor would like to buy Alcoa's stock at the present time I would suggest they expect minimal growth through 2013 and be patient while global regions start to grow. There is a good bet that 2014 and beyond will be good years for Alcoa.