Alcoa: Execution is Key

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the past two years I’ve received several emails from disgruntled readers who took issue with me publicly saying that Alcoa (NYSE: AA) is not a bellwether. I will very much stand by that comment today, but those readers may find some comfort in knowing I’ve become a bit more constructive in my outlook for the company.

So why isn’t Alcoa a bellwether in my eyes? Well for one thing the stock has been stuck in quicksand since Klaus Kleinfeld was named CEO/Chairman in May 2008. At that time, the stock was trading at ~$35 per share. As you can see from the historical chart below, compliments of Yahoo!, Alcoa investors haven’t had much to cheer about in recent years. Considering that other commodity markets/players have more than doubled in recent years, to me Alcoa is not a bellwether simply because bellwethers lead, not whimper. What other bellwether do you know that says it has been through “choppy waters” in recent quarters? I can’t help but wonder if some investors will suffer bellwether withdrawal if that bellwether label moved instead to, say, Rio Tinto (NYSE: RIO), a company that is more diversified from a pure commodity basis than Alcoa is. At least Rio Tinto gives investors exposure to aluminum, copper, iron ore, energy, diamonds and other minerals. 

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Now don’t get me wrong, just because I don’t believe Alcoa is worthy of the bellwether status some insist on giving it doesn’t mean I don’t think opportunities abound for the company to seize upon. In fact, areas where I’m particularly interested to see the company’s progress are in recycling (downstream), automotive and next generation technology. 

By 2020, a whopping 50% of Alcoa’s products will be made from recycled aluminum. That is fascinating to me, so hopefully Alcoa doesn’t drop the ball on continuing its current upside momentum in this area. I’d love to see Kleinfeld and his posse talk more about recycled aluminum being ten times more valuable than steel on a per ton basis.   

As for the automotive opportunity in front of Alcoa, they should be doing whatever is necessary to bolster and create new relationships in the industry. The battle cry these days coming out of Detroit is efficiency, and that means light-weight vehicles could be all the rage in coming years, especially for electric cars that need to be lighter due to heavy EV batteries.

Speaking of electric vehicles, Alcoa has never formally said it has a relationship with Tesla (NASDAQ: TSLA), but something that jumped out at me in June was Alcoa going out of its way to issue a press release saluting Tesla on the launch of the launch of the all-aluminum Model S sedan (the 2012 Motor Trend Car of the Year for those living under a rock—not that there’s anything wrong with living under a rock mind you). So just why did Alcoa get so giddy about the Tesla S? Tesla is seen as a cutting edge car company, which means that other automakers may now look to add more aluminum bodies to their line-ups and create the lower weight bodies I alluded to earlier. If Alcoa comes out and says it has a supplier deal with Tesla, that should help speed up further alliances for the company in the auto sector. 

Moving to next generation technologies, have you seen all the cool gadgets at the Computer Electronics Show (CES) in Vegas? Well, if you haven’t, here is a link provided by CNET for some products we may find under the Christmas Tree in upcoming years. The reason I even mention this is there is growing enthusiasm around using the material graphene as a way to develop products like tablets, TV’s, and cellphones that are super thin, and in some cases bendable. Therefore, Alcoa needs to not be left in the cold and off the graphene bandwagon. In fact, I’d like to see them use some of the $1.9 billion in cash to acquire some patents or even some small graphene players so they can market next generation materials to airline and auto customers. Yes, Alcoa has been using cash to pay down debt and I applaud them for that, but the company can’t simply rely on ways of old to move into tomorrow’s markets (that’s another reason I don’t think they are a bellwether, by the way).

Rather, they need to embrace change and explore how graphene could be used as an extension of some of the company’s existing alumina products. Does this sound so far-fetched? I don’t think so considering that back in 2009 the company signed a memorandum of understanding with the Russian Corp of Nanotechnologies to explore the role of next-gen aluminum in future markets (i.e. offshore drilling, energy efficient buildings, transport, etc.). The company also forged an alliance with the University of Michigan for a next-generation solar vehicle which needed a lower weight aluminum body. My point is that if graphene is lightweight (nearly paper thin), stronger than steel (maybe 100-200 times stronger), and can be bendable, Alcoa needs to get involved in the space, or it may have to rely much more on recycling aluminum in the future to generate revenues. 

2013 is the Chinese Year of the Snake. This means change is coming, and Alcoa should pay attention. Enough of the restructuring! Let’s see execution. If the company can show it can become a true leader (notice I did not say bellwether) in adopting to future markets, the Year of the Snake could make Alcoa a surprise winner to add to the portfolio. If the company won’t embrace change, the Year of the Snake may turn venomous and bite investors like it has since 2008. 

bluephoenixinc has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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