Alcoa (AA), the worldwide leader in all phases of the aluminum industry, has been through an extremely tough period since the Great Recession due to economic and aluminum pricing challenges. However, the best time to invest in a company can be during down periods within the industry in which it operates, especially when a turnaround is inevitable. I believe that this is currently the case with an investment in Alcoa.
Restructuring its areas of focus
Over the last five years, aluminum commodity prices have been extremely volatile and have plummeted on several occasions. As a result, Alcoa's earnings and share price have been adversely affected due to its extensive involvement within the upstream portion of the aluminum industry.
Since the commodity price of aluminum is a factor that is out of Alcoa's control, the company has decided to reduce its exposure to aluminum commodity prices and focus mainly on what it can control: minimizing costs and expanding its high-growth value-added businesses. This will result in more predictable earnings, higher growth levels, and eventually a much higher stock price.
A bright future for Alcoa
Aluminum is light, corrosion resistant, and an excellent conductor of electricity and heat. In addition, the strength-to-weight ratio of certain aluminum alloys is second to none. These properties are an extreme advantage in certain applications and are allowing aluminum to be considered for an increasing number of new products.
An example is an upcoming Ford F-150 model, which is rumored to be constructed out of an aluminum alloy. This alloy would result in a tremendous reduction in the weight of the truck, significantly lowering fuel consumption.
Aluminum alloys are also prime candidates for next-generation jets. Alcoa is currently working with Airbus and Boeing (BA 0.01%) on design possibilities. In order to keep up with the projected demand increases, Alcoa is expanding its aluminum alloy production capacity.
Alcoa is involved in a multitude of industries, including aerospace, energy, automotive, buildings, defense, and electronics. Its ability to create innovative new value-added products within these industries, such as its new series of energy efficient and sustainable architectural products, will drive positive results in the future.
Analysis of competition
Alcoa is not the only company within the aluminum industry that has been adversely affected by economic and industry conditions. Noranda Aluminum Holding Corp. (NORNQ), a producer of aluminum and provider of rolled aluminum sheet and extrusion billet products, has operated at a loss for two consecutive quarters.
Noranda does not have the diversity of Alcoa and as a result is also affected by aluminum commodity price plunges. Noranda may be a good short-term investment if you are bullish on aluminum prices, but I believe that Alcoa is the best long-term investment due to its extensive industry knowledge and its downstream product diversity.
Some of Alcoa's main competitors are companies within the steel industry such as Nucor (NUE -1.04%). A case-by-case evaluation is typically required to determine which metal should be utilized.
Both steel and aluminum have their own unique advantages. Aluminum is favored when its lightweight and corrosion resistance properties are required, and steel is favored when the initial cost is the driving factor.
Nucor is one of the better investment opportunities within the steel industry due to its efficient operations, shareholder-friendly management, and diverse product mix, which includes steel mesh, fasteners, and joists.
I consider both Alcoa and Nucor to be great investment opportunities for the long-term. However, Alcoa currently has more upside potential because the steel industry has recovered more up to this point than the aluminum industry. Although aluminum has extreme advantages in certain applications, fewer customers can afford the premium cost during recessions. As a result, the recovery of the aluminum industry has lagged steel's recovery and is still in its early stages.
Alcoa, a great opportunity for the long term
Alcoa's share price dipped to $5 per share in 2009, which was a 20-year low. Although its share price has rebounded nicely off of its low point to above $10/share, it's still well below its all-time high of above $40/share. Wall street is not considering Alcoa's inevitable recovery, and as a result, we have been provided with a compelling investment opportunity.
In 2007, Alcoa's earnings per share were at a record high of $2.95 before falling to a $1.06 loss in 2009. The company has maintained profitability since and will be in a position to consistently grow earnings beginning in 2014. Alcoa pays a moderate dividend yielding 1.1% and should begin growing it in the near future.
The Foolish bottom line
The market has priced Alcoa as if it will never grow again. However, the company is poised for a tremendous recovery, and I believe that Alcoa has the potential to reach its all-time highs within the next decade. Investors that are focused on the long term should give it a closer look.
