In one of my recent posts on stock pricing, I received a comment from one of our more acerbic readers, who asks some good questions once he simmers down. He wonders why investors have not bid up the share price of Alcoa Inc. (NYSE: AA):
- "How come nobody has the hots for ALCOA? It is very cheap. . . There is mining stock merger-mania yet nobody is buying ALCOA in anticipation of it occurring to ALCOA as well. Are we gonna wait until it is too late?"
First of all, I should remind everyone that the price of a stock on any given day is a myth. It is worse than a myth, it is just a fleeting moment in time. I would call it semi-arbitrary most of the time.
Alcoa closed yesterday at $34.06, having a trailing P/E ratio of 11.5. That falls between its 52 week low of $26.69 and its high of $48.77. Also worthy of note, Alcoa has a yield of 2% which is about 10% higher than your average S&P stock. This seems positive.
Perhaps my friend is on to something. Alcoa is off its high considerably and has a lower P/E and higher yield then any of the indices. But its ROE of 15 and ROIC of 11 are all too average, not exceptional -- and these are important considerations. The P/B of 1.89 also seems average but the P/S of 1.03 looks very appealing.
An investment in a stock is based on future earnings and the metrics that we use to anticipate them. In examining Aloca prospects for this year I found that analysts believe 2008 earnings will be less than they were in 2006 and perhaps the same as last year. Speculation about 2009 is higher, but it is speculation.
It seems that in making a bid for Alcan last year and buying a portion of Rio Tinto plc ADS (NYSE: RTP) this year, Alcoa is trying to buy its way into some growth because on its own it is having difficulty finding any. That is not to say that the company is not valuable, but the value is very well established. Hopes for a rally may rely on the futures price of aluminum more than expanded operations.
In comparing Alcoa, which I have considered buying periodically, to one of my favorites, the Aluminum Company of China (NYSE: ACH) (often referred to as Chalco), I found it wanting. ACH has a lower P/E of 10 and higher yield by 10% of 2.2%, a P/S of 0.35, an ROE or 30 and a ROIC of 21 and better growth prospects in the largest new market, China.
As I remind investors, AA and ACH share prices are based on future prospects and ACH wins that discussion very easily. Given that the P/S is less than half and the ROE and ROIC are double that of Alcoa, there is no contest. Alcoa knows this all too well and has actually teamed up with Chalco in acquiring a portion of Rio Tinto and helping them hold off hostile bidders BHP Billiton Ltd ADR (NYSE: BHP).
If I were to guess how Alcoa (the stock) does this year, I think it just keeps on coasting along with the price of aluminum until some new catalyst triggers some buying. That could be a major merger or acquisition, a buyout, a huge increase in the demand side if construction spending in North America picks up, or entering a new related business with better growth prospects.
All said, Alcoa should be on your watch list because even without a major catalyst it is still building equity, just slower than others, and if the price stays depressed at current levels, by next fall it could very well be a steal and you will get to it first.
Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. To find potential opportunities and verify his track record, read Chasing Value or Serious Money. Disclosure: I own shares of ACH.
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Reader Comments (Page 1 of 1)
2-12-2008 @ 3:11PM
gumbo koontz said...
OK OK OK SHELDON,
Now the ball is in my court and I am gonna swing my racklet so hard that the tennis ball will go through your body .
Me , acerbic ?, you are very funny...
Now, you see....what every investor has to understand about stocks is that it is more than just numbers like PE, high and lows and all that nice terms....
I can offer you a long mutliple list of reasons why aluminium prices has not gone up lately like copper, tin, nickel, molybdenum, gold, silver, zinc, platninum, etc you name it. Everything went up except ALUMINIUM!!!
You ask yourself as you hold a pound of aluminium in your left hand and a pound of steak ini your right hand. Which one do you really honestly think is supposed to be worth more?? Very elementary!! ALUMINIUM! Yet , a pound of steak sell for $3-$15 while a pound of aluminium only $1.20-($2 fabricated like extruded or casted)
The next reason... if you still have fair memory, you would recall that there had been a rash of copper thievry gone amok across our country as druggies cut off thick copper wires or tubes off installments. Even bronze statues are ripped off in the parks, etc. Our government is doing a miserable job of regulating our scrap dealers. Things are getting better lately, arent they? Maybe they are still happening but this is NO EXCUSE for blaming high but fair prices for copper . It doesnt mean that we have to keep aluminium artificially low to avoid reoccurences. It is the government's job to police the scrap dealers not me... I dont give a shit what you are thinking now.. End of discussion on this area.
Lets move on... now you are hearing or getting hundreds of junk mail from vinyl window installers offering to replace your old aluminium windows with vinyl windows for $3990 , right?? they are all over our country stripping off aluminium off millioins of homes as I write... Naturally, they are flooding the supplies with those scraps . It wont last very long.... Once every home is replaced with vinyl crap , there will cease to be a source of oversupplying!!!! When? Very soon!!! I am sure of that....
Other reason.... China is the largest producer of aluminium in the world and you ask yourself why does China have to produce so much aluminium while denying so many millioins of its own people of the electricity they need to light up their homes or heating their homes whatever. China has 1.5 billion people and most are still without electricity while China eat up so much electricity to produce aluminium. this is the dumbest energy policy I ever know around here... China use so much coal to do that... Most of China population had to resort to cow dung to make fuel. Oh Jesus!!! What a lowdown!!Eh?
Do you know that our automotive industry round the world is supposed to use more aluminium along with other lightweight materials to shed weight off our cars and pickups but is draggin own feet.. Why?? There is still not enough smelter capacity to support our voracious automotive industry. We produce like 80 million cars a year and if you mulitply each by an average of 250 pounds each .. whatdo you get? that is 20 billion pounds of aluminium. Wait a minute..I am telling youthat 250 pounds is not enough to make a car lighter .. It is more like 800 pounds or more. We cant use more aluminium becaue our worldwide smelter capacity is only 70 billion and slowly growing... If we put 800 pounds in each of our cars and pickups, we wont have any left to build jets, truck trailers, ladders, store front window frames, so many little other inidustrial uses to count.
What do we need todo toincrease our smelter capacity?? Raise aluminium prices simple as that...
I have so many more reasons to tell you... But... Sheldon , you are just a lowly number dude... I dont just look at numbers. I look around , smell around, taste , see, keeping an open mind. look into the future not so far...
what I see is just a lousy beltway politic brewing around at Wall street as far as aluminium is concerned. I dont give a crap about what the analysts are saying about aluminium today or tomorrow... They are just liars , period!!
Aluminium prices will hit $3 a pound . I guarantee it. When ? I dont know, beat it!!
Ifyou choose to dig your heels deeper and deeper by refusing to buy ALCOA until I give up and sell it. You do not have a prayer and you will suffer for it, not me...
I will run circles around you until you sink ...Just surrender yourselves and yo willl feel a lot better...
2-12-2008 @ 3:43PM
Sheldon L said...
"Aluminium prices will hit $3 a pound . I guarantee it. When ? I dont know,..."
WHEN ACTUALLY MATTERS A WHOLE LOT! We all know it will be $3 a pound sometime in the future.
2-12-2008 @ 3:50PM
gumbo koontz said...
Then I assume that you have no disagreement with all my points above whatsoever!!
What it means is that we have to sell off some other undeserving stocks like stinky Altira and dumb thermostat maker Honeywell to free up capital to buy ALCOA.
We can not entertain any take over offers by anybody like BHP, Rio Tinto, or anybody until aluminium hit $3 pound first... Rio Tinto stole Alcan from sappy Canadian investors!! Oh boy are they so dumb to givev up Alcan for $100 a share. Alcan would be worht $300 once aluminium prices get to $3 a pound.
ALCOA is not for sale yet. First , show me $3 aluminium .
Look at Phelps Dodge.... PD shoot up from $25 to $260 a share in a few years when Freeport McMoran bought PD after copper hit $3.50 a pound. Why didint FCX buy PD before ?? PD investors are not stupid!!
ALCOA shareholders better not be as stupid as ALCAN shareholders were with Rio Tinto. STUPID STUPDI STUPDI STUPIDO...
2-12-2008 @ 3:55PM
gumbo koontz said...
I bet that American diplomats flew to China and make request to the Chinese government that they not shut down inefficient smelters so to keep aluminium prices down at the same time scolding them for mistreating prisoners. Such drivel diplomats thinking they can mess around with ALCOA shareholders...This is what I mean by beltway politics in Wall Street borrowed from Washington Dc... China ought to shut down more than half of smelter capacities and give the electricity to the masses who need them more to keep their homes lighted and buying nice amenites like refrigerators, stoves, TVs and computers.... 800 million Chinese are still without electricity, I may be making this up. Who got the right number? anyone!! oh sheesh!
2-12-2008 @ 3:57PM
gumbo koontz said...
Do you really prefer to cook and heat your home with dried cow dung?? c'mon!! This is no tourist curiousity!! That is blatantly conscending toward the Chinese masses. Our American diplomats are just idiots!!
2-14-2008 @ 9:52AM
gumbo koontz said...
I really cant help but getting the feeling that I am taking a stroll through a chicken farm and watching chicken scattering away from me as I go... Wall Street is crawling with chickens....