As one of the world's largest aluminum companies, Alcoa, Inc. (NYSE:AA) could be the ultimate way to play a cyclical recovery in the global economy. Aluminum is used in so many applications ranging from consumer goods to industrial products. Alcoa supplies a number of industries including aerospace, automobiles, construction, energy, defense, and more. This stock was once trading around $40, before the 2008 financial crisis took its toll on the global economy. It has not been able to muster a rally back to those levels due to continued concerns over the global economy. However, investors with a long-term outlook might want to put a little Alcoa in their portfolios for the upside that could come with an eventual global economic rebound. Here are 3 reasons to consider buying Alcoa now:
1) Insider buying can be a buy signal for other investors since directors and officers tend to know the companies they work for better than outside investors and analysts. On October 11, 2012, an Alcoa director named Martin Sorrell bought 4,145 shares in a transaction valued at $36,419.60. He also bought shares in April in a transaction valued at just over $18,000.
2) Alcoa shares appear cheap when considering that it trades below book value, which is $12.67 per share. While it might not look cheap in terms of PE ratio, it could be misleading to only consider what this company can currently earn while the global economy remains depressed. For example, Alcoa is expected to earn 25 cents per share in 2012, and while the economy is not expecting a huge rebound in 2013, analysts still expect earnings to more than double in 2013 to 67 cents per share. That is one sign of how Alcoa's earnings power might be like a coiled-spring and able to surge once global growth resumes.
3) Even with challenging industry conditions, Alcoa recently managed
to report better than expected earnings. Excluding charges of about
$175 million, Alcoa earned $32 million or 3 cents per share in the third quarter of 2012. Analysts had expected the company to post break-even results, so this was good news for shareholders.
With a challenging global economy, it might seem too early to buy Alcoa, but once the signs of a rebound are evident, stocks like Alcoa could move extremely fast, just as many home building stocks have done in the past few weeks. For example, KB Home (NYSE:KBH) shares were trading below $7 in June and have more than doubled to over $15 per share today. Analysts at Dahlman Rose have set a $13 price target for the stock. This would provide investors with a gain of roughly 50%, and the longer-term upside could even be higher.
Here are some key points for AA:
Current share price: $8.74
The 52 week range is $7.97 to $11.66
Earnings estimates for 2012: 25 cents per share
Earnings estimates for 2013: 67 cents per share
Annual dividend: 12 cents per share which yields 1.4%
Book value: about $12.67 per share
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informational purposes only. You should always consult a financial
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.