Alcoa Will Shine - Barron's

Shares of Alcoa (AA), the worlds largest aluminum producer, have way underperformed those of other global miners like BHP Billiton (BHP), Rio Tinto (RTP) and Vale (RIO). Barron's thinks the Street is underestimating its potential, especially if a buyout bid materializes.

Aluminum prices are up about 20% YTD to $1.30/pound. They could hit $2 by early 2009 amid tightening supply of bauxite (the key raw material in aluminum production) and higher energy costs. That's good news for Alcoa: EPS could easily jump from an estimated $3.80 to $4.79. Even at the former price, shares trade at a reasonable 10x estimated earnings.

Investors have in the past been unhappy with Alcoa's consumer units. It recently sold its consumer division for $2.7B.

Citigroup mining analyst John Hill has a price target of $50 on the $39 shares. If a takeover comes into play, $60 is more likely. Four reasons Hill thinks that's a likely scenario: 

A defining global franchise... lack of a controlling shareholder, growth potential from properties that would be difficult to duplicate, and a non-Himalayan stock chart.

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Chinalco (ACH) and Alcoa recently took a 9% stake in Rio Tinto, subject of an aggressive courtship by rival BHP Billiton (BHP). If you want to bet on a higher bid, Stephanie Grimmett likes Chinalco...

Comments

[Marc Courtenay:]

Very helpful report, Eli. I like your less wordy, direct-to-the-point writing style too.
I've been burned twice by buying AA, and the current market volatility leads me to believe we all might have a better entry point (below $35) between now and November. Speculation and unexpected developments like takeover rumors could drive it up short-term instead of down, so maybe a more prudent approach is to get half a position soon and hope to buy the other half later.

2008 Jun 08 09:13 PM

[Moise Levi:]

Good article Eli !
I am bullish on Alcoa on a technical basis ; its above its 200 day moving average, and has a stronger relative strengh compared to the other Dow stocks. So when the Dow bounces up (its oversold), I expect Alcoa to zoom up

2008 Jun 09 04:17 AM

[Loh:]

The strength of Alcoa is more on the down stream industry e.g. shhet, plate, foil, aircraft alloy, automobile alloy etc. Alcoa sold off most of its upstream many year ago.

Other aluminium companies such RTZ, BHP are more upstream e.g bauxite mining, alumina refinery (coverting bauxite to alumina) , smelting (converting alumina to aluminium ingots).

Beware that the rise in aluminium will cut Alcoa bothway.

As most other aluminium comanies has merged , I agree Alcoa is relatively small in the industry and are potential for take over. However as Aloca is also involved in hght tech alloy for defence and supply to the US defence industry, it might be too sentitive for a foreign take over.

2008 Jun 09 06:58 AM

[didcrywolf:]

Not sure Alcoa will be above $40 by year end. I do not think the company's MGMT can extract all the value on its own and the company needs to merge. Unfortunately as credit contracts globally, I am not sure who could come into the US in an election year where a protectionist wind blows strong in Washington and start to bid up the stock. With the airlines, autos and housing in a tailspin, I don' think the compnay can be epxected to have ANY blowouts Quarters until mid 2009. I own the stock but sold calls to bid my time. A straight long position in the stock sounds too risky right now and Barron's always made me money writing premium on their stock ideas!!!!

2008 Jun 09 03:15 PM