Comparing America's 3 Largest Aluminum Companies

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Includes: AA, CENX, KALU
by: Joseph Cafariello

Summary

The Aluminum industry is expected to underperform the S&P broader market substantially this quarter, outperform significantly next quarter, and outperform substantially beyond.

Mean/high targets for the 3 largest U.S. Aluminum companies – Alcoa (AA), Century Aluminum (CENX), and Kaiser Aluminum (KALU) - range from 7% to 50% above current prices.

Find out which among Alcoa, Century and Kaiser offers the best stock performance and investment value.

* All data are as of the close of Friday, November 14, 2014. Emphasis is on company fundamentals and financial data rather than commentary.

It is the most abundant metal on our planet, and third most abundant element after oxygen and silicon, amounting to some 8.3% of all atoms in the Earth's crust. With an atomic weight of 13, it is the 13th lightest element out of 115 elements known to man. It was used in the middle ages as an astringent and dye, and was named "alum" in old French, derived from the Latin "alumen" meaning bitter salt.

Today we know it as aluminum, and it is used for so much more than it ever was. It is almost everywhere - from soda cans to food packaging, computers to electronic devices, automobiles to aircraft. Its resistance to corrosion makes it ideal for any application that comes into contact with moisture, such as food packaging and automobiles. Its light weight gives it an unmatched strength-to-weight ratio, making it indispensable in applications that require strength where weight must be kept low, such as in air- and spacecraft.

"No other metallic element can be used in so many ways across such a variety of domains, like in the home, in transport, on land, sea and in air, and in industry and commerce," physics researcher Sam Davyson describes its usefulness.

Aluminum is also one of the most environmentally friendly metals, as its recycling requires only 5% of the energy used to produce new aluminum from ore to finished product, while still retaining almost 100% of its natural pre-recycled qualities.

With so much going for it, aluminum is not only here to stay, but is continually becoming more and more popular as the metal of choice in manufacturing. As such, producers of aluminum are sometimes considered bell-weathers whose performances portend the next direction of industrial production and the state of manufacturing.

As graphed below, after aluminum producers dipped below the broader market S&P in mid 2007, for instance, the broader market quickly followed. As they climbed above the S&P in early 2008, the broader market gained a little bit too. Finally, as the aluminums crashed through the S&P in Q3 of '08, the entire market came crashing down right after them until bottoming-out in March of 2009.

Source: BigCharts.com

But the Aluminum industry's leadership works in the other direction too, as plotted below where the largest three U.S. aluminum producers - Alcoa Inc. (NYSE: AA), Century Aluminum Co. (NASDAQ: CENX), and Kaiser Aluminum Corporation (NASDAQ: KALU) - have outperformed the broader market almost straight through the economic recovery of the past 5.5 years.

Where the broader market S&P 500 index [black] has gained some 200% and the SPDR Basic Materials Sector ETF (NYSE: XLB) [blue] has gained 170%, Alcoa [beige] has risen 210%, Kaiser [orange] has gained 310%, while Century [purple] has gained 2,500%.

On an annualized basis, where the S&P 500 index has averaged 35.29% and the XLB has averaged 30%, Alcoa has averaged 37.06%, Kaiser has averaged 54.71%, while Century has averaged 441.18% per year - all amazing performances as you would expect from an equally amazing metal.

Source: BigCharts.com

Since both the global economic recovery and industrial production are expected to slacken over the immediate term before revving back up again in the near future, we can understand why the Aluminum industry's earnings growth would imitate that pattern as tabled below, where green indicates outperformance while yellow denotes underperformance.

Where the industry's earnings are seen shrinking in the current quarter, they slowly pick up next quarter and into 2015, growing at some 1.77 to 12.48 times the broader market's average earnings growth rate, before settling down to a more sustainable 2.16 times the growth rate over the next five years.

Zooming-in a little closer, the three largest U.S. companies in the industry are seen split performing - with remarkable growth for Alcoa and Century reaching as high as 25.78 times the broader market's growth rate over the near term, while Kaiser struggles with earnings shrinkage in the current quarter before posting solid growth the next quarter and beyond.

Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

In the most recently reported quarter, Century posted the greatest revenue growth year-over-year by a substantial degree, while Kaiser had the least.

Since Century's earnings growth is not available, the metric will not factor into the comparison. Though it is worthy to note that where Alcoa enjoyed incredible year-over-year earnings growth, Kaiser contended with earnings shrinkage.

• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.

Of our three contestants, Kaiser operated with the widest profit and operating margins, while Alcoa and Century split the narrowest margins between them.

• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

For their managerial performance, where Kaiser's management team delivered the greatest returns on both assets and equity, Alcoa's and Century's teams again split the worst performances between them.

• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Of the three companies here compared, Kaiser provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Alcoa's DEPS over current stock price is both the lowest and in shrinkage.

• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, each is cheapest relative to one of the metrics. At the overpriced end of the spectrum, where Alcoa's stock is the most overvalued relative to forward earnings, Century's stock is most overpriced relative to company book value and 5-year PEG.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, Century offers the highest percentage of current quarter, next quarter and 2015 earnings over current stock price. At the lowest percentage end of the scale, Kaiser offers the lowest current and next quarter earnings over current stock price, while Alcoa offers the lowest on 2015's earnings.

• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, Alcoa's and Century's stocks are expected to post the greatest earnings growth rate over the immediate quarters, while Century has it for 2015 and Alcoa has it on the next five years' average. At the slow growth end of the spectrum, Kaiser's stock is seen offering the slowest growth over the immediate term, while Alcoa and Century deliver them in 2015 and beyond respectively

• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean and low price targets over the coming 12 months, analysts believe Alcoa's stock has the greatest upside potential and greatest downside risk, while Kaiser's stock reciprocates with the least upside and least downside.

• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, Century is best recommended with 2 strong buys and 3 buys representing a combined 62.50% of its 8 analysts, followed closely by Alcoa with 6 strong buy and 4 buy recommendations representing 52.63% of its 19 analysts, and lastly by Kaiser with 3 strong buy and 2 buy ratings representing 50% of its 10 analysts.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.

And the winner is… Kaiser by a light atomic weight, outperforming in 10 metrics and underperforming in 8 for a net score of +2, followed close behind by Century, outperforming in 12 metrics and underperforming in 12 for a net score of 0, which is in turn closely followed by Alcoa, outperforming in 8 metrics and underperforming in 10 for a net score of -2.

Where the Aluminum industry is expected to underperform the S&P broader market substantially this quarter, outperform significantly next quarter and substantially in 2015, before settling down to meaningful outperformance over the next five years, the three largest U.S. companies in the space are expected to put in a split performance, with Alcoa and Century outgrowing the broader market astronomically over the near term while Kaiser shrinks before growing modestly.

Yet after taking all company fundamentals into account, Kaiser Aluminum Corporation displays more strength for its lighter weight, given its lowest stock price to company book, highest cash over market cap, widest profit and operating margins, highest returns on assets and equity, highest EBITDA over revenue, highest dividend, and best low price target - narrowly winning the Aluminum industry competition.

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