Alcoa's (AA) rapid return to profitability is nothing sort of miraculous. Just like Ford (F), Alcoa's management has managed to turn the company around. In 2009, Alcoa recorded a loss of $1.151 billion, in 2010 a profit of $254 million, and in 2011 a profit of $611 billion. Yet the share price has not recovered from the 2009 level it fell to. This has prompted several investment research centers, including Morningstar, to value Alcoa at more than double its current share price.
Why buy Alcoa?
- Morningstar rates its fair value as $19.00, more than a 100% upside, and recommends buying at $11.40.
- The price of aluminum is meant to rise more than 25% over the next four years, providing Alcoa with higher profit margins over the next few years. On top of this, Alcoa expects sales to double in less than a decade. So, over the long run Alcoa should see a large increase in revenue with little cost increase.
- The company has divested many of its unprofitable downstream assets and started to move its downstream operations to low cost areas. It has built a bauxite mine in Brazil as while as expanding its refinery there. It has also added to its operations in Russia. In both of these areas cost are more than 30% lower than in the US.
- Alcoa is involved in all stages of the production process: bauxite mining, alumina refining, aluminum smelting, and producing aluminum products. This will allow it to adapt quickly and efficiently to changes in price and demand in the future.
- The company's liquidity is also very strong as it has $1.7 billion of cash on hand. It has very manageable debt with a debt to equity of 0.6 and this is a significant improvement on the amount of debt it had when the financial crisis struck. Along with this, it has increased capital expenditures 16% compare to last year.
- Alcoa faces stiff competition from China, Russia and the Middle East. Investment by companies in these markets in the upstream side of the aluminum business might harm Alcoa's long-term position.
Nonetheless, Alcoa is well positioned compared to its rivals as, although China is the largest producer of aluminum, Alcoa has about 25% lower costs than its Chinese rivals due to its positioning in South America and Russia. Therefore, over the long run Alcoa is in a much better position to grow. So, this stock pick is very appealing for growth investors looking to add another stock to their portfolio.