5 Reasons Alcoa Is a Top Stock to Buy

Bargain valuation, solid operations provide reasons for optimism

   

5 Reasons Alcoa Is a Top Stock to Buy

best stocks for 2012 logo1 5 Reasons Alcoa Is a Top Stock to Buy Alcoa (NYSE:AA) is a company that hasn’t made a lot of friends on Wall Street. Alcoa shares are off about 75% from their 2008 peak. The stock has gyrated around wildly ever since — from $17 at the end of 2009 to a low of $10 in summer 2010, then back up to $18 in spring 2011 before crashing to under $9 just in December of last year.

With Alcoa, you’re undoubtedly taking a tiger by the tail. But I remain convinced that now is the time to grab hold, with the chance of riding this wild stock to big profits again by year’s end.

Here’s why:

Improving Earnings: I have been beating this drum for months — first in my original recommendation for Alcoa stock back in December as part of the InvestorPlace 10 Best Stocks for 2012 contest, then again after Alcoa posted strong earnings on Jan. 9 and I couldn’t help put crow “I told you so.” The fact is this makes nine straight quarters of year-over-year revenue growth. It has also seen YOY profit increases in eight of the last 10 quarters. Even though the bottom line isn’t anything to get thrilled over — first-quarter net earnings of just $94 million, or 9 cents a share, which adjust up to a measly 10 cents a share excluding special items — the fact the company is making money despite projected losses is proof that the balance sheet is turning around.

Bargain Valuation: Alcoa has a P/E of 12.1 based on fiscal 2012 forecasts of 82 cents a share, and forward P/E of 10.4 based on fiscal 2013 forecasts of 96 cents a share. Considering how many stocks have run up in the last six months, there aren’t many opportunities for value out there. Alcoa is one of them. It’s also worth noting that if Alcoa just manages to get back up to the top of its 52-week range ($8.45 to $17.96), you’re looking at a nearly 80% profit from here. If it just gets back to the middle, you’re “only” sitting on 30% gains.

Stronger Capital Structure: Alcoa has a fairly meager yield of about 1.3%, based on a quarterly payout of 3 cents. But the Alcoa dividend been stagnant since March 2009, after being cut from 17 cents quarterly, and now the payout ratio is a paltry 22%. Historically, the S&P pays more like 50% of its profits to dividends, so a dividend bump could be in the works if Alcoa wants to get aggressive with its payouts. If not, improvements in its capital structure that have reduced debt loads and streamlined operations, so there’s much more wiggle room in Alcoa if it needs to spend money for growth — or just wants to keep a bigger cash cushion.

Strong Baseline Demand: In its earnings report, Alcoa forecast aluminum demand to increase 7% in 2012 — and that’s amid continued geopolitical trouble in the Middle East, debt woes in Europe and persistent housing and unemployment troubles in the U.S.! That’s because, as with oil purchasers, aluminum purchasers have strong baseline demand and can never completely collapse. Alcoa is showing that its streamlined operations are the right size for this uncertain environment, providing short-term stability as well as the agility to ramp up and capitalize on long-term opportunities if and when the recovery gains momentum in 2012.

Nowhere for Aluminum to Go But Up: The biggest knock against Alcoa is that aluminum prices remain painfully low. Weak demand in Europe, global uncertainties and excessive production continue to depress prices. But considering that AA made a profit and beat expectations even in this challenging pricing environment? Well, that means that once pricing starts to tilt in Alcoa’s favor, there will be even bigger profits. True, it’s not like Alcoa is rolling in cash after this quarter’s earnings, but it was soundly in the black — and at aluminum prices like these, that counts for a lot.

Full disclosure: In the spirit of taking my own advice, I purchased 540 shares of AA stock at $8.95 on Dec. 14. I hope that adds a bit of realism to my commentary on the stock across 2012!

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/5-reasons-alcoa-is-a-top-stock-to-buy/.

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