Alcoa Corporation (AA) has been among the strongest performers in the recent roller coaster ride of the stock market. Shares have reversed course posting some of the larger gains among Dow components.
The stock is currently trading at around $10.20 per share, about 67% over its 52-week low of $6.80. The high for the period was $44.77.
This recent run-up in the stock has come in the face of significant negative news regarding the company. Aluminum spot prices have reversed their worldwide decline but remain at depressed levels primarily as a result of the state of the world economy. Alcoa has idled about 15% of its production capacity as the decline in the sale of new autos accelerates.
Alcoa’s investment in Rio Tinto, the London based mining and metals giant has soured. In February, Alcoa contributed $1.2 billion to the acquisition of a 10% interest in Rio being purchased by ACH Chinalco for $14 billion. The company expects to book additional losses attributable to this purchase in 2009.
Alcoa is in a relatively weak competitive position as compared to its chief rival, Chalco (ACH). Chalco is in a stronger capital position, trades at a lower multiple to earnings and has a lower debt-to-asset ratio with higher operating and net profit margins.
The company has a current ratio (current assets vs. current liabilities) of 1.36, which is positive but marginal. It’s debt-to-equity ratio is .67, which is relatively high based on industry averages which hover around .50. The debt-to-capital ratio is favorable at .36
An additional negative with respect to the company’s balance sheet is the possible impairment of goodwill. Alcoa has a market cap of about $7 billion and stockholder equity of $14 billion. If any of that goodwill becomes impaired, the company could face some difficulty with its lenders.
In spite of these negatives, Alcoa has continued to enjoy excellent access to the commercial paper market. With a credit rating of BB+ from S&P, Baa1 from Moody’s and BBB from Fitch, the company bonds have fared much better than most other corporate bonds being actively traded.
In July, ahead of the collapse of the corporate bond market, Alcoa extended the average life of its outstanding long term debt to 9.2 years from the previous 8.6 years at an average rate of 5.6%. With only $100 million maturing in 2009 and $600 million in 2010, the company is well positioned to weather the economic storm, at least through 2010.
Alcoa bonds are actively traded. The company’s bonds maturing 7/15/1013 carry a 6% coupon and have recently traded at a price of 88, generating a yield to maturity of 9.2%. Priced at this level, the bond should be an attractive option for any investor.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. James F. Dlugosch contributed to this article.
