Is There Any Upside for This Aluminum Producer?http://www.fool.com/investing/general/2013/10/13/would-decent-earnings-report-lift-shares-of-this-a.aspx Vladimir Zernov
October 13, 2013
Disappointing aluminum prices have put pressure on Alcoa's (NYSE: AA) shares throughout the whole year. The company just released its third-quarter earnings report, beating analysts' estimates. Alcoa managed to report income of $0.11 per share despite lower aluminum prices. Does it mean a fresh turn for the business?
Should you be encouraged by productivity gains? I would recommend staying cautious. Alcoa's progress is notable, but it does not solve the main issue – low aluminum prices. You cannot increase productivity forever. This task gets harder as business processes become more optimized. Even with the gains in productivity, the results are modest. The $24 million net income achieved in the third quarter does not look very impressive for a company with an $8.5 billion market cap.
Shift to value-add products
This is bad for companies like Century Aluminum (NASDAQ: CENX), which is totally focused on producing primary aluminum. Quite surprisingly, its stock is performing in-line with Alcoa this year. Unlike Alcoa, which is expected to finish the year with a $0.28 per share profit, Century Aluminum is expected to lose $0.77 per share. The company is trading at a 41 forward P/E compared with Alcoa's 18 forward P/E. I see no way the valuation of Century Aluminum could be sustained and expect more downside to come.
The performance of Kaiser Aluminum (NASDAQ: KALU) is quite different. The company is focused on production of semi-fabricated specialty aluminum products and is not exposed to aluminum p