Is It Time to Buy Alcoa Stock?

The aluminum giant's share price has soared, but can the business keep up?

Aug 19, 2014 at 11:46AM

Aa Aircraft
Aluminum-made aircraft have always been a huge part of Alcoa's business. Source: Alcoa.

The recession of 2008 hit the entire global economy hard, but Alcoa (NYSE:AA) sustained some of the longest-lasting effects of the crisis of any company outside the financial industry. As demand for construction and infrastructure-related commodities tumbled, the aluminum giant had to deal with huge levels of oversupply in the industry and the resulting crash in metals prices. Then, even as most of the economy recovered sharply in the years following the crisis, Alcoa was slow to regain momentum. With the stock finally moving upward strongly over the past year, though, many investors have started to see Alcoa as a possible good-news story. Let's take a closer look at this company to see whether the stock deserves interest from investors right now.

Valuation: Getting ahead of fundamentals?
A decade ago, Alcoa took full advantage of the boom in commodities demand, capturing its fair share of customers seeking lightweight applications. Emerging markets provided much of the worldwide demand that Alcoa saw for aluminum products, and that led to solid results for the company, as well as to the rise of a competitive aluminum industry in China and elsewhere.

When the bottom fell out of the global economy, Alcoa felt the impact especially hard, and its Chinese competitors played a major role in holding the industry back in the years that followed. Alcoa attempted to use its history of innovation to its advantage, but the sheer size of China's production base combined with slowing GDP growth even in formerly fast-growing emerging market countries held back its efforts. Even as other areas of the economy recovered, Alcoa still had to deal with overcapacity in aluminum production that weighed on prices and kept its stock from enjoying gains similar to its industrial peers.

AA Chart

AA data by YCharts.

Fundamentally, Alcoa's most recent recovery reflects the hope that the company's new strategy will continue to produce earnings growth. Specifically, in order to deal with raw aluminum prices that remain at fairly low levels, Alcoa has worked hard to build a portfolio of tailor-made products that it can sell to its better customers. These value-added products include key components for the aerospace and automotive industries, as technological advances and the ongoing need for greater fuel efficiency have given potential Alcoa customers the incentive and the means to capture cost-saving competitive advantages against their own rivals. For now, though, the full extent of the earnings growth that investors are hoping for hasn't yet materialized; from that perspective, even a successful performance could leave the stock playing catch up in the short run.


Aluminum wheel. Source: Alcoa.

Cleaning up against the competition
Part of Alcoa's success has come from maintaining a long-term view of the aluminum industry's potential. On one hand, Alcoa has made many corporate decisions to rein in production, closing smelter facilities and temporarily shuttering other operations to do its part toward shrinking overall industry supply and putting a floor under aluminum prices. On the other hand, even as major competitors Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP) have sought to sell off some aluminum assets -- largely unsuccessfully -- Alcoa has kept its eyes open for good long-term deals. Alcoa's willingness to make strategic acquisitions will serve it well when aluminum prices finally recover.

Alcoa has done well to make moves in line with its overall corporate strategy. The company's purchase of aerospace component producer Firth Rixson for $2.85 billion further accentuates Alcoa's commitment to the aircraft industry. With trillions of dollars' worth of potential new airplanes due to be built in the next 20 years, Alcoa's efforts to be the go-to provider of customized aluminum materials for aerospace have a huge potential to pay off. In addition, Alcoa has taken steps to ensure that other materials don't supplant aluminum, with a partnership with a Russian producer of titanium helping to diversify Alcoa's product base and helping give aerospace customers a single platform for all their needs.

Aa Aluminum Ingot Small

Source: Alcoa.

Domestically, Alcoa towers above its peers in the industry. But nimble players such as Noranda Aluminum and Century Aluminum still pose a threat, as their smaller size could make them better able to adapt to changing circumstances more quickly.

Is Alcoa a good buy right now?
With the share price more than doubling in less than a year, it's hard to see today as a perfect time to buy Alcoa stock. Geopolitical and economic risks have grown more numerous in 2014, yet that hasn't stopped share prices from continuing to climb. Yet if Alcoa's plans come to fruition, then investors might well never get a better chance to buy the aluminum giant's stock. From that perspective, even a small pullback like the one we've seen over the past month is a potential buying opportunity for long-term investors.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information