Is Alcoa Really Worth Just $8 Per Share?

Smart companies use tough times to position themselves for the eventual recovery. During the recession industrial parts supplier MSC Industrial Direct (MSM 0.77%) viewed the landscape as a land grab, an opportunity to pick up large swaths of market share by competing where others couldn't and acquiring small players that didn't have its sound financial footing.

It seems aluminum miner Alcoa (AA) is trying to do the same thing, using the industry's current weakness as a chance to better position itself for the turnaround to come. Lower aluminum prices have hurt the aluminum king's operations, but through a series of targeted acquisitions it believes it will have a much stronger presence once the industry comes through the other side.

Although the market is still suffering from global economic malaise, the long-term prospects are shinier than a roll of aluminum foil, and investors ought to view Alcoa's current single-digit share price as a big opportunity to profit.

Alcoa snapshot

Source: FinViz.com.

Recycling growth
Alcoa reported that aluminum prices were 17% lower in the third quarter than they were a year ago and are down 5% sequentially. With China's economy still slowing faster than analysts expected, the miner reduced its estimate for aluminum demand from 7% down to 6% for 2012. Yet it still expects the overall market to double by 2020, or to grow at a rate of about 6.5% a year over the course of the next decade, and that means if it positions itself now, it can continue being the premier aluminum player in the future.

To do so, it's looking to acquire aluminum assets from BHP Billiton (BHP 0.33%) and Rio Tinto (RIO -0.83%), which have been closing or selling projects as pricing has tumbled. Aluminum is down 3.3% in 2012 following an 18% decline the year before and currently trades around $1,950 a metric ton on the London Metal Exchange. If they're willing to sell, Alcoa is ready to buy.

Ready to take flight
Although the miner's revenues fell 9% to $5.8 billion and adjusted profits dropped to $0.03 a share, both numbers were well ahead of analyst expectations because it has become a more efficient operation. It enjoyed strong productivity growth upstream and downstream because of higher utilization rates, process innovations, lower scrap rates, and usage reductions.

In particular, Alcoa is looking to the aerospace and automotive industries for succor. There is a global backlog of some 8,500 planes where Airbus and Boeing (BA -0.76%) will be the primary beneficiaries, and they expect the industry to grow at a solid 13% to 14%. Car manufacturers are also in the driver's seat, with Ford (F 0.47%) and General Motors (GM 4.37%) helping to push the industry to a near 15 million-car sales run rate, the highest level since March 2008. Alcoa anticipates that the industry will expand by 11% to 15%,  and with Tesla (TSLA 1.85%) producing award-winning, all-aluminum cars,  it ought to provide an additional jolt.

The global economy remains dicey, and China's largest aluminum producer, Chinalco (ACH -7.55%), has faltered for many of the same reasons as Alcoa. Its revenues were down 11% last quarter, and though it admits the industry is beset by "though times," it expects 2013 to be where things change. Alcoa is not so hopeful yet, considering the demand slowdown, but it is counting on the country's stimulus spending to boost production, and that could be another lever in Alcoa's favor should Chinalco prove right.

Getting left back
In short, there's a lot to like despite the headwinds the aluminum producer faces. At 12 times earnings estimates, it's a better value than Alumina (AWCMY 1.13%), Century Aluminum (CENX -2.45%), or Kaiser Aluminum (KALU -0.21%). Its enterprise value does trade at a lofty 56 times its free cash flow, but only Kaiser offers a better (and very attractive) EV-FCF ratio of 10.

I'm rating Alcoa to outperform the broad market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. I think that despite global economic weakness, Alcoa will use the opportunity to ride over the landscape like a conquering warlord and accumulate assets that will pay off in the future when the tide turns.

Feel free to comment below whether you agree that the miner will be able to dig its way out of the hole it finds itself in.