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Will The Market Show Faith In An Aluminum Recovery?
In the metals market today, details matter. Iron ore giant Vale (Nasdaq:VALE) is near a 52-week high, as are major gold producers like AngloGold Ashanti (NYSE:AU) and Newmont Mining (NYSE:NEM); copper companies like Freeport-McMoRan (NYSE:FCX); and diversified mining giants like Rio Tinto (NYSE:RTP). (For background reading, see A Beginner's Guide To Precious Metals.)
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Unfortunately, Aluminum companies are not feeling the love. Spot prices on the London Metal Exchange have recovered nicely from early summer lows, but aluminum giant Alcoa (NYSE:AA) is trading closer to the bottom of its range than the top. Will solid third-quarter results and improving underlying trends start a new move up in the stock, or will Wall Street stay in a "show me" mode a while longer?
The Quarter That Was
Alcoa delivered a relatively strong third quarter compared to analyst expectations. Revenue rose more than 15% compared to the third quarter of 2009, driven by strength in alumina (a naturally occurring ore used in the smelting of metal) and primary metals, and beat the consensus expectation by a solid margin.
Speaking of margins, the company managed to see solid leverage despite unimpressive utilization rates. EBITDA climbed 33% in the period, and the company surpassed Wall Street earnings expectations by at least 3 cents. Depending upon how an analyst/investor chooses to adjust the earnings, Alcoa beat earnings by 3 or 4 cents.
The Road Ahead
Alcoa saw higher shipments in downstream operations, and prices were trending up during the third quarter. Aerospace demand was pretty solid (likely a decent read-through for Boeing (NYSE:BA)) and automotive demand was a little better, though still at rather low levels on a historical basis. Demand for packaging was not quite as robust, which makes it interesting that aluminum container producers like Ball (NYSE:BLL) and Silgan (Nasdaq:SLGN) are both near 52-week highs.
Looking ahead, it's anybody's guess whether aluminum prices can continue to strengthen. Prices seem to be improving as Chinese smelters close down in response to high electricity costs and energy efficiency requirements. If aluminum prices go too high, though, and large local producers like Chalco (NYSE:ACH) become unable to meet all of the demand, it seems reasonable to assume that Chinese officials will relent and allow these smelters to resume operations - after all, it has happened before. Like steel, then, that leaves aluminum pricing in a different place than mined metals like copper.
The Bottom Line
Alcoa shares seem much too cheap when compared to other metal and mineral companies, including the downtrodden steel sector. Investors who feel left behind by the big runs in copper, gold, and so on might see this as a relative bargain. Moreover, it seems like global demand for aluminum should be on the way up and even the specter of higher Chinese production may not stop the price run.
These shares can be extraordinarily choppy, though, and a cheap-looking valuation can get even cheaper. Risk-tolerant investors might want to take a flier on Alcoa, but this stock is not for the faint of heart. (For related reading, see The Steel Sector: No Jam Today, But Maybe Tomorrow.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
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Unfortunately, Aluminum companies are not feeling the love. Spot prices on the London Metal Exchange have recovered nicely from early summer lows, but aluminum giant Alcoa (NYSE:AA) is trading closer to the bottom of its range than the top. Will solid third-quarter results and improving underlying trends start a new move up in the stock, or will Wall Street stay in a "show me" mode a while longer?
The Quarter That Was
Alcoa delivered a relatively strong third quarter compared to analyst expectations. Revenue rose more than 15% compared to the third quarter of 2009, driven by strength in alumina (a naturally occurring ore used in the smelting of metal) and primary metals, and beat the consensus expectation by a solid margin.
Speaking of margins, the company managed to see solid leverage despite unimpressive utilization rates. EBITDA climbed 33% in the period, and the company surpassed Wall Street earnings expectations by at least 3 cents. Depending upon how an analyst/investor chooses to adjust the earnings, Alcoa beat earnings by 3 or 4 cents.
Alcoa saw higher shipments in downstream operations, and prices were trending up during the third quarter. Aerospace demand was pretty solid (likely a decent read-through for Boeing (NYSE:BA)) and automotive demand was a little better, though still at rather low levels on a historical basis. Demand for packaging was not quite as robust, which makes it interesting that aluminum container producers like Ball (NYSE:BLL) and Silgan (Nasdaq:SLGN) are both near 52-week highs.
Looking ahead, it's anybody's guess whether aluminum prices can continue to strengthen. Prices seem to be improving as Chinese smelters close down in response to high electricity costs and energy efficiency requirements. If aluminum prices go too high, though, and large local producers like Chalco (NYSE:ACH) become unable to meet all of the demand, it seems reasonable to assume that Chinese officials will relent and allow these smelters to resume operations - after all, it has happened before. Like steel, then, that leaves aluminum pricing in a different place than mined metals like copper.
The Bottom Line
Alcoa shares seem much too cheap when compared to other metal and mineral companies, including the downtrodden steel sector. Investors who feel left behind by the big runs in copper, gold, and so on might see this as a relative bargain. Moreover, it seems like global demand for aluminum should be on the way up and even the specter of higher Chinese production may not stop the price run.
These shares can be extraordinarily choppy, though, and a cheap-looking valuation can get even cheaper. Risk-tolerant investors might want to take a flier on Alcoa, but this stock is not for the faint of heart. (For related reading, see The Steel Sector: No Jam Today, But Maybe Tomorrow.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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