This year has been a rough one for commodity stocks to say the least. Commodity stocks are often an appealing way to play raw materials, as futures can be extremely volatile. But in 2015, there has been no escaping the race to the bottom for commodities across the board.
In the wake of a stronger U.S. dollar and plummeting global demand, prices have been in an apparent free fall.
Aluminum giant Alcoa (AA) — a popular commodity pick — has been no exception. Despite a nearly 5% one-day bump yesterday, shares have lost more than 40% of their value thus far in 2015.
I feel confident that this recent jump is foreshadowing for a full rebound in Alcoa stock. Shares have been unfairly battered thanks to shortsightedness and misbranding.
Alcoa Actually Has Outstanding Prospects
Alcoa is best known for its work with lightweight metals — mainly aluminum, but also titanium and nickel, which are all used in aircraft, automobiles, commercial transportation, packaging, building and construction and more across the world.
Once again, Alcoa has been unable to escape the commodities bloodbath. In the face of lower aluminum prices, both the top and bottom lines have suffered. In the most recent quarter, revenue fell by double digits and missed Wall Street’s consensus. Meanwhile, the company’s metals business ended in the red for the three-month period, while overall earnings came in 46% lower than analysts had expected.
Forward-looking estimates don’t seem to suggest much relief at first glance. For the current quarter, the consensus has slid from earnings of 14 cents per share to just 4 cents per share over the last few months. Meanwhile, the full-year estimate has been shaved from 79 cents to 58 cents.
So why exactly am I so optimistic about Alcoa stock? One big reason: The company’s pending split.
The Upside for AA Stock
Despite the fact that Alcoa is associated with aluminum, the company has actually been working to shift its focus recently, honing in on high-performance engineered products by snatching up relevant companies like Firth Rixson, Tital and RTI. The CEO pointed to these new additions and organic growth opportunities as the reason that the company’s downstream business can now stand on its own and offer growth for investors as well.
According to CNBC, efforts to address the divergence of the company’s struggling, cyclical upstream business and its high-growth downstream business was difficult to communicate to investors. That problem should be solved with the split, allowing Alcoa to unlock the value in this promising industry.
Proof of potential comes from the fact that the downstream portfolio — currently dubbed “value-add” has more than doubled its contribution to Alcoa’s after-tax operating income between 2008 and 2014, hopping the 50% mark last year. Meanwhile, about 40% of the upstream company’s revenue through June 30, 2015 was thanks to the high-growth aerospace industry.
Add it all up and it’s clear that Alcoa stock has more potential than ugly aluminum prices would make you believe. Hidden behind those headlines is a high-growth focus that has been brewing for some time and will final realize its full potential with this restructuring.
Don’t miss the opportunity to get in at a discount.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
