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Alcoa (NYSE:AA) is always one of the first companies to report each quarter. It reports Monday July 11, 2011, after the market closes. It should do well. Aluminum prices have on average risen since Q1 2011. The chart below from the LME shows aluminum prices from April 5, 2010 to July 1, 2011.

 

As you can see from the chart (the date is in format DD/MM/YYYY), the average price of aluminum was higher in Q2 2011 than in Q1 2011. It was much higher than in Q2 2010. This means profits should increase. Alcoa has implemented productivity improvements in the last year. Plus Alcoa signed a multi-year $1B supply contract with Airbus at the Paris Air Show to supply Airbus with Alcoa’s new aluminum-lithium alloy. This alloy is purported to give airplanes made with it a 12% improvement in fuel efficiency. Airplanes made with it can weigh up to 10% less than planes made with composites. Alcoa should get many further contracts from airplane makers for this alloy. It should give Alcoa a big competitive advantage going forward.

This one big new contract with Airbus should allow Alcoa to guide higher when it reports on the 11th. Add to that Boeing (NYSE:BA) and Airbus far exceeded estimates for new planes ordered at the show. Revenue growth had been forecast to improve by 17.10% in 2011 and 5.80% in 2012. It should do better now. Plus aluminum demand is expected to increase by 12% this year. It is expected to double in the next 10 years. Aluminum is also expected to acquire an as yet inexactly estimated amount of demand due to the increase in copper prices. Aluminum is expected to be used more as a substitute for copper in any number of cases. This kind of outlook should add fuel to the fire under the Alcoa balloon.

On top of that Alcoa has beaten EPS growth estimates in all four of the most recent quarters. Alcoa is estimated to grow earnings by 138.90% this year, and grow earnings for the next five years by a whopping 36.40% per annum. Even fast growing Cliffs Natural Resources Inc. (NYSE:CLF) is only estimated to grow earnings for the next five years by 27.06% per annum. It is likely that this quarters report may be the beginning of a good move up for Alcoa.

Good supply and demand fundamentals should also help the other aluminum makers. The following table of fundamental financial data shows how Alcoa stacks up against other aluminum makers. Two competitors are Kaiser Aluminum (NASDAQ:KALU) and Century Aluminum Company (NASDAQ:CENX). Kaiser Aluminum also recently signed a big aluminum contract with Airbus. The data are from TDameritrade and Yahoo Finance.

Stock

AA

KALU

CENX

Price

$16.49

$55.00

$16.34

1yr. Analysts’ Price Target

$19.67

$61.00

$20.33

PE

23.00

64.40

20.95

FPE

10.85

15.94

8.74

Avg. Analysts’ Recommendation

2.7

2.3

3.0

This Year EPS Growth Estimate

138.90%

64.10%

41.30%

Next Year EPS Growth Estimate

17.80%

48.10%

21.20%

This Year Revenue Growth Estimate

17.10%

23.20%

24.10%

Next Year Revenue Growth Estimate

5.80%

11.80%

6.40%

5yr EPS Growth Estimate per annum

36.40%

2.00%

20.50%

EPS misses in the last 4 quarters

0

3

3

Avg. EPS beat % in the last 4 quarters

+25.625%

-18.075

-16.50%

Stock Price Appreciation % YTD

+4.37%

+8.76%

-0.18%

Price/Book

1.17

1.13

1.26

Price/Cash Flow

7.23

26.59

11.17

Beta

2.27

1.34

3.94

Short Interest as a % of Float

5.68%

6.3%

7.57%

Cash per Share

$0.86

$2.95

$3.15

Market Cap

$17.54B

$1.04B

$1.52B

Enterprise Value

$25.98B

$1.13B

$1.53B

% Held by Institutions

60.76%

100%

52.17%

Total Debt/Total Capital (mrq)

33.56%

14.40%

20.57%

Quick Ratio (mrq)

0.74

1.6

1.73

Interest Coverage (mrq)

8.11

4.86

3.32

Return on Equity (ttm)

5.57%

1.83%

6.44%

EPS Growth (mrq)

241.18%

37.22%

295.29%

EPS Growth (ttm)

195.77%

-76.61%

166.47%

Revenue Growth (mrq)

21.92%

20.60%

14.35%

Revenue Growth (ttm)

15.15%

14.73%

26.06%

Annual Dividend Rate

$0.12

$0.96

--

Gross Profit Margin (ttm)

19.05%

12.21%

9.98%

Operating Profit Margin (ttm)

5.17%

4.42%

10.19%

Net Profit Margin (ttm)

4.25%

1.46%

6.20%

AA and CENX are the best of these three. They sell at lower multiples and have higher growth rates. AA has the competitive advantage of the new aluminum-lithium alloy to sell. Enough said. One should always look at the technicals too. The one-year charts below show these stocks' recent price performance.

Click to enlarge charts

The one-year chart of AA:

 

The one-year chart of KALU:

 

The one-year chart of CENX:


These charts all show weak uptrends in the stocks. They also show that each stock is overbought in the short term. Theoretically you would not want to buy these now. You would want to wait for them to be oversold. However, the earnings announcement is coming up for Alcoa on Monday July 11, 2011. If you believe the growth story for AA, you might think the earnings announcement and forward guidance should push Alcoa's stock price up. If so, you have to buy now. Or alternatively, you can buy a call options spread for July. It is reasonable to think AA could rise up to and perhaps above its recent high above $18. It is reasonable to think the AA 1 year analysts' price target could recieve upgrades. My inclination is to buy, even in AA's currently overbought state.

You cannot really predict the overall market's direction exactly in the near term. However, I think the long term story for Alcoa is good, especially with the high copper prices creating an extra "substitution" demand going forward. Plus Alcoa does have a new aluminum-lithium alloy that should give it a competitive advantage.

Source: Alcoa Earnings: Company May Guide Higher, Boosting Others