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Using a Value Line Report: What Gives Alcoa its Luster?
At first glance, Dow 30 component Alcoa (AA - Free Alcoa Stock Report) would probably not entice most investors. But a closer look reveals that the stock has quite a bit to offer those with a more specific investment strategy. Before we consider what makes Alcoa a decent selection, we will briefly discuss its background and how the aluminum maker came to be the titan it is today. (For more on this, read our Dow 30 Profile.)
Alcoa’s existence dates back over a century, when aluminum was quite rare and difficult to find in its pure, basic form, unlike silver and gold. In 1886, an American named Charles Martin Hall and Frenchman Paul Heroult separately made a novel discovery, creating an extraction method for drawing out aluminum from bauxite ore. Two years later, Hall joined together with Alfred E. Hunt (a metallurgist from Pittsburgh) and a small group of investors, and founded the Pittsburgh Reduction Company, renamed Aluminum Company of America in 1907. In 1999, the moniker was shortened to Alcoa.
With the burgeoning automobile industry and the break out of World War I in the early part of the 20th century, the company enjoyed its rapid rise as the leading aluminum producer, expanding internationally through acquisitions and gaining control of more than half of the world’s aluminum capacity. But the company would eventually face hard times during the Great Depression, with demand for the metal plummeting and business suffering. Meanwhile, attempts by the United States government to curb what it believed to be Alcoa’s anti-competitive behavior, given the company’s dominant control of aluminum supply, opened the door to competition. That, in turn, dramatically narrowed the company’s market share.
In the coming decades, Alcoa would divest assets, only to jump back on the acquisition bandwagon and spread its operations to South America, Europe, and Africa. In the 60’s, it delved into new realms, such as fabrication. That served as a gateway into the beverage industry, where the company’s innovative concept of easy-open aluminum cans took off. Through the years, Alcoa would be affected by price fluctuations of the shiny material and major economic events, including the oil and energy crisis in the 70’s, which severely squeezed aluminum production. By the late 80’s, internal struggles prompted management changes, and the new leadership took steps to streamline the company into a leaner, more focused and efficient entity.
Today, Alcoa is a world leader in the manufacture of aluminum and nonaluminum products that serve a variety of end markets within the aerospace, automobile, commercial transportation, packaging, building/construction, oil/gas, defense, and industrial sectors. Through its four units, it engages in the mining of bauxite, the smelting of aluminum, the manufacture of aluminum plate and sheet, and the making of aluminum and titanium alloys for various applications.
Initially, Alcoa does not seem to have many eye-catching qualities. Looking at the top left corner of the Value Line page, we note that the issue is ranked 3 (Average) for Timeliness. This measures a stock’s price and earnings momentum, compared to the performance of the broader market, and it ranges from 1 (Highest) to 5 (Lowest). Like most blue chips, Alcoa is not a standout for its short-term relative price action.
The dividend yield (in the Top Label) is rather modest, at 1.4%, versus the median yield for all the stocks under our coverage, which has been a little over 2% in recent months. Keep in mind that the yield indicates the expected return from cash distributions on the equity over the coming year.
Alcoa’s financial and risk metrics are nothing to write home about, either. We can easily deduce that from the items found in the Ratings box, located in the lower right-hand corner of the page. Specifically, the aluminum producer gets a Financial Strength rating of B+, implying that its financial position, based on such items as cash and debt level, is just mediocre. The issue, meanwhile, doesn’t score all that great for Stock Price Stability (35 out of 100), and it gets a low mark of 10 (out of 100) for both Price Growth Persistence and Earnings Predictability.
Taken together with the Safety rank of 3 (found at the top left corner), where 1 is Highest to 5 is Lowest, the metrics suggest AA shares have fairly moderate to somewhat above-average risk. This is further supported by the Beta coefficient (located in the same section) of 1.40, which shows that the stock’s volatility is above that of the market (where 1.00 = the market). (Note that a figure lower than 1.00 means the equity is less volatile, while a number that is higher indicates greater volatility than the overall market.)
Still, Alcoa does possess some appeal. Scanning the Projections box (on the upper left side of the page), we see that the stock offers substantial capital appreciation potential out to 2016-2018. The annual total return potential, which factors in price appreciation possibilities and prospective dividend increases, is quite sizable, too. The Price Chart should help investors visualize the equity’s projected rebound in the coming years.
All in all, while Alcoa is not a strong selection for near-term price performance and comes with a bit more risk than many of its Dow peers, it might well pique the interest of the more risk tolerant investors seeking a solid income-and-growth vehicle. Covering analyst Dominic Silva points out in his Commentary that “we are cautious about Alcoa’s short-term outlook”, but later concludes that “Alcoa stock offers wide price-recovery potential over the 3- to 5-year investment horizon”.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.