Is This Company’s Stock Worth Purchasing Now?

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

One of the world's top producers of alumina and aluminum, Alcoa (NYSE: AA) recently declared its earnings and gave a positive outlook for 2013. It reported better than expected results, which were welcomed by the market.  The company reported revenues of $5.9 billion, up by 1% from the previous quarter, but 2% down in comparison to the prior year.

Measurable aspects

Alcoa generated cash flows from operations of $933 million for the quarter, $670 million more than the previous quarter, and ended with a strong cash position. The company met all of its cash sustainability targets for the fourth consecutive year and also improved on its productivity and overhead expenses. At the end of the quarter, the company had $1.9 billion in cash, which proves its extremely strong liquidity position.

At the moment, the debt-to-capital ratio of the company stands at 0.35 and the net debt of the company stands at $7 billion, which is at its lowest since 2006.

Looking forward

Aluminum demand is recovering at the moment, and Alcoa expects demand to grow at a 7% rate during 2013, which is up from the 6% growth in 2012. The company is well positioned to exploit this increase in demand. Due to integrated operations and control on different levels of supply chain, Alcoa will be able to achieve synergies and reduce its costs. The company does everything, including mining, refining, smelting, and recycling of aluminum. It expects 9%-10% growth in Aerospace and 1%-4% in automotive as aluminum use is increasing over steel in the production of vehicles. The metal is also replacing copper in a variety of applications, including HVAC, consumer electronics, and building facades. Thus a growth of 4%-5% is also expected in building and construction in the future. This shows that there is substantial growth potential for Alcoa and these diverse drivers of demand can have a longer-term bullish effect on aluminum prices.

Areas to be considered

The company has a competitive advantage over its competitors, such as Aluminum Corporation of China (NYSE: ACH) and Century Aluminum Company (NASDAQ: CENX).

Century Aluminum, supplier of standard-grade, high-purity and value-added primary aluminum products to diverse downstream manufacturing customers in the aerospace, automotive and energy industries, is a small company that is finding it difficult to operate in this competitive environment. It is in a transition from serious losses to hopefully a small profit in 2013 and has announced that its Hawesville smelter in Kentucky is no longer viable because of the high costs of power under its current contract. Therefore it has recently terminated the power contract on the plant and is looking for alternatives in an effort to keep the plant open. Thus Alcoa has nothing much to worry on competition front from Century.

Aluminum Corporation of China Limited, better known as Chinalco, has had to deal with the same headwinds as Alcoa, but both companies can recover if China's big $150 billion infrastructure spending package produces results. The shares of the company are currently trading up by about 2.9%.

Takeaway advice

Alcoa is currently trading at attractive prices and the company is also in a great financial position. Global demand for aluminum is increasing, which will provide Alcoa an opportunity to grow. Due to its strong hold as one of the biggest operators in the market, it seems that Alcoa will exploit the growth opportunities in the market in the days to come too. I expect Alcoa to have a better year than 2012, and the stock price should move upwards. Therefore I would recommend a strong buy.


garimaarora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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