Is Alcoa an iPhone 5 Play?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the droves of news stories and editorials being written in the wake of Apple’s (NASDAQ: AAPL) iPhone 5 release, the most bizarre was a piece released by the Wall Street Journal linking Alcoa (NYSE: AA) to the new device. The story recounts a series of Tweets released by the company extoling the virtues of the aluminum used in the phone, using it as a bit of excitement with which to promote the fast-paced world of smelting. While I am not suggesting that any connection between Alcoa and the 6th generation iPhone is more than fleeting, it does provide a springboard for considering an investment in aluminum.
The Backdrop for Aluminum
Where Apple is known for making announcements that can shake up how consumers and investors view technology, Alcoa’s claim to fame is that it is the company that kicks off earnings season each quarter. While this has not been an enviable position for the company over the past year or so, the tide may be changing. With most traders expecting the Federal Reserve to announce the next round of quantitative easing on Thursday – the official probability is trading at 60% - commodity producers are looking strong. The bond-buying program instituted by the ECB and the recently announced stimulus package in China got things rolling; the introduction of QE3 should be the trifecta needed to take these stocks even higher.
The Chinese Connection
The prices of precious metals have been strong over the last few weeks, largely on general economic weakness and the threat of relaxed monetary policy. Where the Chinese stimulus package is having the deepest impact is in base metals. Companies like Freeport-McMoRan (NYSE: FCX) which have exposure to both precious and base metals have been ideally positioned, but with China committing to spend $156 billion on stimulus, producers of everything from copper to aluminum to coal have benefitted. The focus of the Chinese stimulus is on infrastructure; that means construction spending and the need for raw materials. Interestingly, over the past five trading sessions, Alcoa, Freeport and Alpha Natural Resources (NYSE: ANR), a strong coal play, have each outperformed Apple – even into the iPhone 5 launch (see chart).
Other Alcoa Positives
Alcoa has undoubtedly been in a bit of a slump over the past several quarters. Demand has been low and the company has not been putting up particularly impressive numbers. Where that may become a benefit today is that while the company has improving free cash flows, it still has a price-to-book below 1.0. This means that the company’s share price represents a discount to the value of its assets. While there are no universal truths to be gained from this, a depressed price-to-book is usually seen as a positive for investors. The improving free cash flows offer some evidence that the company is heading in the right direction. If the uptick in Chinese demand – signaled by the approval of the stimulus package – comes to fruition, Alcoa has significant upside.
Also on the positive side, the company recently received its third offer for its smelting operation in Sardinia. The company has made clear its intention of closing the location in the absence of a realistic offer. To date, the offers received have not been sufficient, but claims by the Turin-based bidder that it can run the plant on far cheaper wind power should be seen as a positive. While the economics of the deal are not critical to the company, the ongoing interest provides anecdotal evidence of quietly increasing demand.
While an investment in Alcoa carries risk directly tied to the global economic situation, the market and the stock are well positioned for a recovery on a risk-reward basis. The good news for any soon-to-be iPhone 5 owners is that they will be able to research the aluminum in their new phone at The Motley Fool, tweet about their stellar investing acumen and likely execute their trades with cutting-edge style. For us mere mortals, we can find normal channels through which to buy this stock.
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.