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Is Alcoa About to Go on a Roll or Get Steamrolled?

Sean Williams
July 24, 2012

Shares of Alcoa (NYSE: AA  ) hit a 52-week low on Monday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
As goes China, so will go Alcoa. Although Alcoa supplies aluminum products to North America, Europe, and Asia, it has been China's rapid infrastructure expansion that's been the driving force behind much of the metal demand we've witnessed over the past decade.

China's second-quarter GDP figures came in slightly ahead of Premier Wen Jiabao's initial estimates and grew by 7.6%. While that may seem robust to us in the United States, where growth rates are more commonly around 3%, this represented China's slowest growth in more than three years and is well below its 30-year average growth rate of 10%. In addition to hampering Alcoa's growth, copper giant Freeport-McMoRan Copper & Gold (NYSE: FCX  ) shipped 100 million less pounds of copper last quarter because of the slowdown, and worries persist with Thompson Creek Metals (NYSE: TC  ) , a big supplier of steel-strengthening alloy molybdenum as China's manufacturing sector continues to struggle.

By no means was Alcoa's latest quarter peaches n' cream, but it also wasn't the complete train wreck many had expected. On the bright side, Alcoa's reduced smelting capacity helped contain production and control expenses, which allowed it to produce an adjusted profit of $0.06 -- not too shabby considering aluminum prices fell 18% year over year -- and maintained its view that global aluminum demand would rise by 7%.

Challenges, of course, still remain. Weaker macroeconomic trends are straining aluminum demand and pricing, which, in turn, keeps putting off Alcoa's expansion plans. With its business so intricately tied to the economy and little resolution in sight in terms of Europe's debt woes, it could be a long while before Alcoa is back to being in great shape.

How it stacks up
Let's see how Alcoa stacks up next to its peers.

AA Chart

AA data by YCharts

As you can see, the aluminum sector as a whole has had a terrible past year, with Rio Tinto (NYSE: RIO  ) leading the pack with a loss of 39% and Aluminum Corp. of China (NYSE: ACH  ) on the opposite end of the spectrum with a loss of 50% over the past year.


Price / Book

Price / Cash Flow

Forward P/E

Debt / Equity

Alcoa 0.6 4.3 7.6 56.4%
Rio Tinto 1.5 4.2 5.2 36.2%
Aluminum Corp. of China 0.7 21.1 15.9 138.6%

Source: Morningstar, Yahoo! Finance.

Macroeconomic weakness ha