Building using Alcoa aluminum composite panels. Image source: Alcoa.
Among materials stocks, Freeport-McMoRan (FCX 0.68%) and Alcoa (AA) play key roles in their respective industries. Freeport is an industry leader in mining copper, and its exposure to gold as well as energy products gives it some added diversification. Alcoa is well-known for its aluminum products, making engineered solutions as well as providing base commodity metal for customers, but the company has also branched into titanium and other specialty metals for use in applications like the automotive and aerospace industries. Both of these companies have faced challenges in recent years, but times are starting to look up, and investors want to know which of these stocks is the better investment. Let's compare Freeport-McMoRan and Alcoa on several key metrics to see which looks more attractive currently.
Stock performance and valuation
Alcoa and Freeport-McMoRan have both had their stocks hit hard in recent years, but only Alcoa has started to bounce back. The aluminum specialist is up 2% since July 2015, compared to a 22% drop for Freeport over the same time span.
Both Freeport and Alcoa have posted GAAP losses over the past 12 months, and that makes using simple price-to-earnings ratios based on trailing earnings impossible. Freeport's losses have stemmed largely from the plunge in crude oil prices, which has forced the company to revalue its energy reserves and take massive impairment charges. Alcoa has more modest declines, but similar issues involving closing down plants and reducing production capacity have been largely to blame for the red ink.
When you compare Freeport and Alcoa using future projections, a somewhat clearer picture emerges. Freeport trades at about 12.5 times forward earnings as predicted by analysts, and that makes the company look cheap compared to Alcoa's forward multiple of almost 20. Yet when you look at other measures, such as price-to-sales and price-to-book value, Alcoa is the one that looks cheaper. For instance, Alcoa trades at just 65% of its revenue, compared to almost 110% for Freeport. On a valuation basis, the differences between Alcoa and Freeport are too close to call.
Dividends
Many investors rely on dividends, and for them, Alcoa is the only choice. The aluminum maker pays a dividend yield of 1.2%, and it has been relatively consistent about it over the past few years. Freeport-McMoRan, meanwhile, has suspended its dividend, leaving income investors with nothing.
That said, Alcoa hasn't had a perfect dividend history either. The company cut its dividend in 2009, paying investors less than 20% of what it had before the reduction. Even though Alcoa has bounced back somewhat, it still hasn't increased its dividend since then. As long as the company keeps losing money, it'll be hard to boost the dividend.
Moreover, some believe that Freeport's decision to suspend its dividend has been smart. To preserve capital, Freeport is hoping to use money that would otherwise go toward a dividend to pay down debt and maintain its working capital at healthier levels. Given the cash crunch in the energy industry right now, Freeport's decision looks like the lesser of two evils. Nevertheless, the move leaves Alcoa as the better dividend stock.
Growth prospects and risk
It's hard to predict what's coming for Freeport and Alcoa, but there are some things that we do know. For Freeport, ongoing efforts to make sure that its energy business remains self-sustaining have led the company to look for ways to sell off assets or otherwise preserve capital. However, the copper business retains several world-class mining properties in its portfolio, including the key Grasberg mine in Indonesia, North America's Morenci mine, the Cerro Verde project in South America, and the African Tenke Fungurume mine. Copper and gold prices have climbed somewhat in recent months, and even the oil market has stabilized to some extent. It's too early to call a bottom, but Freeport has hope that the worst might finally be behind it.
For Alcoa, the future comes down to its coming split into two separate companies. The upstream business, which will continue with the Alcoa name, faces many of the same pressures as Freeport. Like copper, raw aluminum demand relies on construction and infrastructure activity, and right now, prospects for those areas are fairly weak. New concerns about global macroeconomic health following the U.K. vote to leave the European Union have investors more worried. Yet the value-added business, which will be known as Arconic, has delivered record revenue in its most recent quarter. Investors are quite optimistic about that segment's prospects going forward, especially because the aerospace and automotive sectors are doing extremely well.
Both Freeport-McMoRan and Alcoa have future potential, but Alcoa seems to be a lot closer to making that potential a reality. Freeport still needs more of a turnaround to maximize its value, but the Alcoa spinoff will move the aluminum giant forward a long way toward giving shareholders the stock performance they want to see.
