Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Apparently This Company's Aluminum Is Worth Junk

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Companies reliant on growth in manufacturing and consumer spending have had a tough time over the past few years. Aluminum, unfortunately for Alcoa (NYSE: AA  ) and its peers, falls into this category. The combination of weakened demand and a bit of overkill on the capacity side has led to falling global prices since recent highs in 2011.

This fact was not lost upon Alcoa's management team, but, unfortunately for them, their actions to shore up the company's operations just weren't sufficient enough to overcome the industry's outlook for rating service Moody's. After slicing and dicing its operations to trim the fat of high-cost smelters while increasing production from its higher-performing product lines, the company believed that its investment-grade credit rating was safe. Because of these efforts, its balance sheet looks much healthier than it did in 2008, when it held its highest debt balance of the past five years. 

For the past several quarters, management has been outwardly bullish on the business it expected from a variety of sectors, led by the automotive and aerospace manufacturing industries. Unfortunately, not even these expectations were enough to warrant producing aluminum at the pace it was in 2011. Dim hopes elsewhere prodded management to table 13% of capacity in 2012, with similar expectations for 2013. 

Add all of this up, and one would have expected a safe haven for its credit rating, but Moody's obviously felt differently and made that publicly known last week. Investors shouldn't place all of the blame on Alcoa, though. The struggles being experienced are widespread. Just this year, Rio Tinto (NYSE: RIO  ) issued a full-year loss, in part because of a $14 billion writedown of its aluminum and coal assets. A lengthy turnaround in prices could continue its negative impact to Rio Tinto, as 20% of its 2012 revenues stemmed from this segment.

Even though the downgrade stopped just one rung below investment grade and the outlook is stable, it's still tough to stomach, because management's decisions over the past year or so were aimed at maintaining its rating. Based on Moody's findings, there's still a lot of work to do regarding current debt levels if industry and company-specific forecasts don't improve. Only time will tell how things play out, but Alcoa investors probably haven't seen the last of management's strategic moves just yet. Let's hope they're made prudently, with the long term in mind, rather than with the goal of just reclaiming its previous credit rating.

Despite all of the negativity currently surrounding the aluminum industry, it's still one that's known for its high barriers to entry. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here now to get started.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2469425, ~/Articles/ArticleHandler.aspx, 9/27/2016 6:47:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:00 PM
AA $9.68 Down -0.08 -0.82%
Alcoa CAPS Rating: ***
MCO $108.99 Down -0.28 -0.26%
Moody's CAPS Rating: ****
RIO $32.17 Down -0.24 -0.74%
Rio Tinto CAPS Rating: ***