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Rumors of Alcoa’s Demise Might Be Exaggerated — Maybe

Even positive numbers have chinks in their armor


My colleague Jeff Reeves is so in love with Alcoa (NYSE:AA) that he not only has made it his pick for 10 Best Stocks for 2012, but rumor has it that he’s filled his living room with aluminum sculptures as a symbol of solidarity. Interior decorating taste aside, he’s made a compelling case that I can’t criticize too much — if only for the reason that he’s the one who hired me.

I’m not as convinced, however. I’m not sure you should be jumping in with both feet. Nevertheless, allow me to highlight some pros and cons about the company before making my own suggestion.

I wrote about Alcoa back in September and suggested AA stock was a buy for both regular and retirement accounts. Not a whole lot has changed — except Wall Street seems to have put the stink eye on the company since then.

The good news is Alcoa’s free cash flow for year was about $1.4 billion, which is an improvement over 2010’s $1.2 billion, and better than the negative free cash flow of the previous two years. Management has stated it is seeking to boost that cash flow as well as cash reserves, and with aluminum prices expected to rise by 7% in 2012, they’ll have a lot of help in that regard. The other piece of good news is that an aluminum shortage is expected. So between all this good news and Jeff’s take, what’s not to like?

Although revenue was up 6% year-over-year, it was down 7% on a sequential basis. In the segment breakout, the company saw even further sequential declines — averaging 15% in industrial products, packaging, and building and construction. As for that expected 7% increase in demand, it is below the 10% we saw last year and 13% growth in 2010. The trend is not Alcoa’s friend.

I’m also very concerned about Europe, which, like the rest of the world, is in the midst of massive de-leveraging. This process obviously results in there being less capital to spend, since borrowing is curtailed, which feeds on itself in a vicious cycle. I think there are worse things to come from Europe, which is going to harm demand across all sectors.

So, all that being said, what do I think about Alcoa? My previous article made it clear that Alcoa was a buy for long-term diversified portfolios. If you think you can hold Alcoa for 10 years or longer, then I stick by that call. Alcoa is not going bankrupt and will provide good returns for the long haul.

As for a short-term play, such as for one year, I think you can find better returns with less risk and better dividend payouts than Alcoa. It’s a speculative value play at this point, but I think it will require a lot of patience.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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