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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Alcoa

October 8th 2010 Alcoa
NYSE Symbol: AA
Industry: Aluminum
Price as of 10/8: $12.89


The averages continue to perform great with the Dow hitting 11,000 on Friday for the first time since the first week of May. The economic numbers remain lackluster or downright crummy. Investors are buying the market on the hopes and anticipation that the Fed will start a quantitative easing to boost the economy. The anticipated moved by the Fed has kept the US dollar moving lower sparking a great rally in the commodity stocks. Commodity companies we have featured have performed great. Chevron is up 20% since the summer lows not including a dividend in August. Freeport McMoRan is up 46% from the August lows and Cliffs Natural Resources is up over 50% since the July lows. Noble Energy has not moved as of yet, but remains an attractive investment. This week we'll feature another commodity play that reported strong earnings Thursday night. The stock of the week is aluminum giant, Alcoa. Alcoa has been a dog in the Dow for a long time as the stock has gone nowhere, but this week's earnings seem to indicate that business is improving. Alcoa or any of the commodity stocks are not conservative investments, but they are definitely performing well thanks to the weak dollar and stronger demand particularly out of China.
Thursday night Alcoa, the largest U.S. aluminum producer, beat earnings estimates by 4 cents, with net income coming in at $61 million. Revenues rose 14.6% year over year to $5.29 billion verse the $4.95 billion consensus. Looking forward, Alcoa increased its outlook for global aluminum demand growth to 13 percent from 12 percent, noting growing demand in countries such as China, Brazil, India and Russia or the BRIC countries. Alcoa boosted the outlook for their aerospace business from essentially flat to growth of 2 percent to 4 percent this year. Two clients, Boeing and Airbus were ramping up narrow-body aircraft production. International air traffic is expected to rise about 8 percent. For its automotive business, the Alcoa chief said although August saw the lowest U.S. car sales in nearly 30 years, September was the highest selling month in over a year. Alcoa believes sales will continue to improve on a slow pace, probably slower than we are historically accustomed to. Alcoa expects a modest decline in the beverage can and packaging business in North American caused by weak summer promotions and inclement weather. The worst sector for aluminum remains commercial building and construction.
Following this earnings report, Alcoa's stock jumped 5%. Even with the recent run up in the stock, there seems to be more room to the upside for Alcoa. Four analysts made comments on Alcoa this morning. JP Morgan raised their rating on the stock to Overweight with a $20 price target, up from $16. The analyst raised his aluminum price forecast to $1.06 per lb. in 2011 from a previous estimate of 98 cents per lb and then raised his earnings estimate for Alcoa to $1.38 for 2011, from a prior $1.02, and to 14 cents for the fourth quarter, from a prior 10 cents per share. Another analyst reiterated an Outperform rating and a $16 price target. The analyst stated that buying Alcoa's stock at 9 times forward earnings is a solid entry point. The analyst figures the company has $1.30 to $1.40 per share in earnings power as aluminum prices strengthen and volume and margins improve. A third analyst maintains a Hold rating on the shares. Production cuts in China, general global economic improvement, and the establishment of an aluminum exchange traded fund should help the price of aluminum. The analyst's earnings estimate for next year remains at $1.10 a share, unchanged. A fourth analyst raised his price target to $13.25 from $12. He expects profit margins to hold up in the "midstream" and "downstream" parts of the business, and raises his earnings estimates to reflect improving aluminum prices. His 2010 EPS estimate is revised to 50 cents from 30 cents, while his 2011 estimate goes to $1.02 from 80 cents.
So the earnings estimates for next year are in a range of $1 a share to $1.38 a share. That means the PE for next year could be as high as 13 or as low as 9.5. The volatility in the earnings estimates shows how volatile Alcoa's earnings can be and have been. As mentioned, Alcoa is not a conservative stock, but with business improving hopefully the stock can continue to rally.