Alcoa Stock – 3 Pros, 3 Cons

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When you think of aluminum and metals stocks, you almost instantaneously think of Alcoa, Inc. (NYSE: AA). That’s because the Dow component is the world leader in the production aluminum and alumina. Alcoa makes metals used in countless industrial and household products, from aircraft to autos to construction. The ubiquity of aluminum makes Alcoa a great barometer of virtually the entire global economy.

Since the end of the Great Recession, the performance of AA stock has been stellar. Acloa is up 129% over the past two years, and so far in 2011 the shares are up 10%. And though there was a selloff in AA between mid-February and mid-March, the latest move by the industrial giant’s shares has been decidedly higher. So, will Alcoa continue demonstrating its mettle to investors, or is it time to put AA stock in the tin can?  Here are the pros and cons of Alcoa stock.

Pros for Alcoa Stock

Aluminum prices and demand: Alcoa’s primary metals division produces the aluminum that’s sold to industrial customers, aluminum traders and on commodity markets. This is the core business for Alcoa, and its success is directly tied to aluminum prices. That metric increased 13% in 2010 on strong demand, and with demand for aluminum anticipated to increase by about 10-15% in developing nations in 2011, it could be another big year for AA stock.

Improved debt picture: The  debt rating for Alcoa (NYSE: AA) was recently confirmed at the investment grade level of “BBB-”by Fitch Ratings. The agency also raised its rating outlook to “Stable” from “Negative.” Fitch analysts said Alcoa’s debt should fall by the end of the year as earnings and cash flow generation continues to improve. Fitch’s “Stable” outlook indicates that Alcoa will have sufficient cash to repay its current debt.

alcoa aa stockStrong rebound following a pullback: Alcoa shares suffered a bout of selling in mid-February, after events in the Middle East and Japan provoked a scare throughout the financial markets. Since then, however, the shares have come back strong, and they’ve once again moved above their short-term, 50-day moving average, a technically bullish sign for the stock going forward.

Cons for Alcoa Stock

Reduction in revenue and income: Alcoa (NYSE: AA) has seen a significant reduction in its revenue and income over the past two years. Its sales figures fell from a peak of more than $33.5 billion in 2008 to $21.6 billion in 2009. In 2010, sales recovered to $25.7, and while this is certainly a good start, the company has some work to do before it can return to its sales heyday. Moreover, if aluminum prices rise too much due to global inflation and not global demand, Alcoa sales could very well drift lower.

A Chinese slump: Aluminum is used in a wide range of construction projects, and as such the construction industry is responsible for a lot of the metal’s demand. In recent years, we’ve seen a boom from the Chinese infrastructure build-out craze. In fact, China is the world’s largest aluminum market, and construction accounts for almost 50% of the total aluminum consumed in China. Now, however, the Chinese government is beginning to wind down the construction boom, and the economic stimulus package the country initiated in 2008 is essentially over. This could amount to a potential loss of revenue for Alcoa that may soon be reflected in AA shares.

Exposure to an economic downturn: As a barometer stock for the global economy, Alcoa stock is susceptible to selling on any hint of a slowdown in the world’s economic activity. If the events in the Middle East and Japan wind up putting the brakes on the global economy in any significant way, AA shares could be the first to feel the negative effect.

Verdict on AA Stock

While a good case can be made against AA if global demand for aluminum begins to falter, I think the verdict here must be reached in favor of the pros. As long as demand from an aluminum-hungry world continues driving prices of the metal higher, Alcoa shares should continue delivering investors shiny returns.

At the time of this writing, Jim Woods had no positions in any of the securities mentioned here.


Article printed from InvestorPlace Media, https://investorplace.com/2011/03/alcoa-stock-nyse-aa-aluminum-prices/.

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