Seeking Alpha
Large-cap, research analyst, deep value, dividend investing
Profile| Send Message|
( followers)  

On Monday October 28, Alcoa (AA) announced that it was willing to reopen talks to sell an Italian plant to Swiss industrial group Klesch, after a meeting between trade unions and Italian government representatives. The company had originally decided last year to shut the smelter, citing high power prices for undermining its competitiveness, but political pressure has forced it to maintain the plant while searching for a buyer.

In the wake of Alcoa's announcement, I wanted to take a closer look at the company and highlight a number of reasons behind my decision to remain slightly bullish on shares of AA.

Recent Performance & Trend Behavior

At the close of Tuesday's trading session, shares of AA, which currently possess a market cap of $10.20 billion, a P/E ratio of 38.16, a forward P/E ratio of 22.66, and a dividend yield of 1.26% ($0.12), ended the day at a price of $9.46/share.

(click to enlarge)

Based on their current price of $9.46/share, shares of AA are trading 10.05% above their 20-day simple moving average, 14.12% above their 50-day simple moving average, and 13.47% above their 200-day simple moving average. These numbers indicate a short-term, mid-term, and a long-term uptrend for the stock, which generally translates into a moderate buying mode for both near-term traders and longer-term investors.

Recent Dividend Behavior

Since May 6, 2009, the company has actually maintained its quarterly distribution of $0.03/share over the last four years. The company's forward yield of 1.26% ($0.12) makes this particular aluminum play a considerable option, especially for those who may be in the market for a sustainably conservative stream of quarterly dividend-based income.

(click to enlarge)

Recapping Alcoa's Q3 Earnings

On Tuesday October 8, Alcoa, Inc. announced Q3 net income of $0.11/share which surpassed analysts' expectations of $0.06/share by a margin of $0.05/share. The company's quarterly revenue of $5.8 billion also surpassed analysts' estimates of $5.66 billion by a margin of $140 million. When Alcoa announced earnings of $0.11/share on revenue of $5.8 billion for the third quarter, not only did the company's performance crush analysts' expectations, but year-over-year earnings rose a pretty impressive 275% (excluding Restructuring & Other Special Items) from $32 million to $120 million.

(click to enlarge)

Looking Ahead At A Few Variables That Could Impact Alcoa's Q4 and FY 2014 Earnings Potential, And Not In A Good Way

Although I expect earnings to remain strong through Q4 2013 (my estimations are calling for Q4 net income of $0.07/share which is +0.01/share higher than what analysts are expecting) and all of FY 2014 (my estimations call for a range of $0.39/share-to-$0.46/share), the company's seasonal packaging segment (currently facing pricing pressure) and unfavorable demand in both China and Europe could negatively impact Alcoa's earnings performance over the next year.

How big of an impact could occur? In my opinion, FY 2014 earnings could potentially miss the lower end ($0.39/share or below) of my expectation range especially if any prolonged pricing pressure from the company's seasonal packaging segment as well as the sustained weakness in both China and Europe were to occur.

Risks

According to Alcoa's most recent 10-K, there are a number of risk factors all investors should consider. These factors include, but are not limited to any global economic condition that could negatively impact aluminum pricing, any reduction in demand, or a lack of increased demand, for aluminum, by China, Europe or a combined number of other countries, and lastly, any disruptions by non-market-related forces that could result in the suspension or closure of production facilities.

Conclusion

For those of you who may be considering a position in Alcoa, I'd keep a watchful eye on a number of catalysts over the next 12-24 months, as each could play a role in the company's long-term growth.

For example, near-term investors would want to focus on the company's recent performance and trend behavior, while long-term investors would want to keep an eye on how well the company is able perform during both Q4 and FY 2014 and how mounting pressure from both Europe and China could play a key role in how well the company performs in both the fourth quarter and through 2014. Long-term investors may also want to consider the fact that Alcoa is once again willing to potentially negotiate a sale of its Italian plant to Swiss-based Klesch, and that such a sale could potentially enhance the company's current cash position of $1.02 billion.

Source: A Few Reasons Behind My Decision To Remain Slightly Bullish On Shares Of Alcoa