Alcoa Reports Monday Night - Trading Below Tangible Book Value

Jul. 6.12 | About: Alcoa, Inc. (AA)

Alcoa (NYSE:AA), the basic industrial alumina manufacturer, reports after the close on Monday night, July 9th, with analyst consensus looking for $0.05 in earnings per share, on $5.8 billion in revenue for expected year-over-year declines in earnings per share of 81% and 11% in revenues.

It hasn't been pretty for AA off the '09 market low as it has continued to struggle with the following headwinds:

1.) Declining realized aluminum prices which fell sequentially again during the 2nd quarter, are down 5% in the last 3 months per a note out of Deutschebank, now trading at $1.06 per lb;

2.) Chinese production has forced AA to shutter alumina capacity twice in the last 9 months. In April Alcoa shuttered 390k tons of smelting capacity in the US (according to market research firm Trefis);

3.) Slowing economies in Europe and China have forced Alcoa to reduce 2012 demand growth guidance to 7%, per the April conference call;

Earnings and revenue estimates have been slashed for Alcoa over the last year. Here is the progression of the 2012 consensus earnings estimate for AA over the last 15 months:

July '12 - $0.44 (consensus, pre-release)

April '12 - $0.54

January '12 - $0.66

October '11 - $1.13

July '11 - $1.44

April '11 - $1.45

So why not just sell the stock and be done with it ? Well, there is the rub: the valuation for Alcoa is still pretty tempting, with a tangible book value of $10.60 per share, leaving AA trading at a 15% discount to tangible book value, and as of last quarter, Alcoa's "cash-flow per share" was $1.88 so AA is trading at 5(x) cash flow per share.

The sentiment around AA was nearly as bad around the April earnings release, but AA saved the quarter and beat on both earnings per share and revenues thanks to productivity gains and outperformance in Global Rolled Products.

Technically, AA has not made a significant new low since last October, but I'd hate to see the stock trade down to the $8.30 - $8.45 area again. The stock has now bounced off this area three times in 9 months - another trip down and we could test the '08 - '09 lows. Time is running short for AA.

Finally, Alcoa's peak gross margin was 24% in 2007, when peak earnings per share was near $3 per share. Today gross margin (as of last quarter) was 15.1% so the aluminum giant can generate some upside when pricing is strong.

Some estimate Alcoa's "intrinsic value" at $19 - $20 per share, with the stock trading at less than half that value.

No question Alcoa is thought to be a deep cyclical, and with global growth right now, the sentiment is against the stock and the sector, but that is what value investing is all about.

Disclosure: I am long AA.